Pension funds and Defined Contribution members called to action on climate change

by Carol A Adams

The Chair of the British Government’s cross-party Environmental Audit Committee (EAC), Mary Creagh, has written to the Trustees of the country’s top 25 pension funds asking some probing questions about climate change risks, reporting of such risks and policy interventions on climate risk reporting.

This is an important, if belated, development given the influence of pension funds on the companies they invest in.

In his submission to the EAC’s Green Finance Inquiry, the Minister for Pensions, Guy Opperman, notes that ‘green’ investment is ‘often’ in pension fund members’ long term (financial) interests and that trustees have a duty to take it into account, but that “lack of attention and outright misunderstanding remain widespread among Trustees”.  There is substantial academic research which supports this statement about investor attitudes generally.

The largest UK fund is the Universities Superannuation Scheme (USS) with £61 billion assets under management.  Its members have been taking strike action following a proposal to move them from a Defined Benefit Scheme into a Defined Contribution Scheme. Yet it is Defined Contribution Schemes which have the most potential to shift capital into more sustainable (green) investments.  When the 400,000 plus intellectual members of the USS are reliant on Defined Contribution Schemes they will undoubtedly renew their call for responsible investments and specifically for those aligned to reducing climate risk. It will affect their pocket when they retire – and it is the right thing to do.  Members will use publicly available information to lobby Trustees and those who invest on their behalf about where their money is invested and how the fund is actively engaging with the companies they invest in to minimise climate risks and other sustainable development risks.  Currently, as Defined Benefit members they have the moral incentive to lobby, but not the financial incentive – they don’t bear any financial risk.

Pension funds have an increasing incentive and will be increasingly called upon by Defined Contribution members to push companies they invest in to:

  • follow the disclosure recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (covering metrics and targets, strategy, risk management and governance with respect to climate related risks); and,
  • report on broader sustainable development risks and opportunities (aligned with contributing to the Sustainable Development Goals (SDGs).

In a submission for the Bank of England, Sarah Breeden, Executive Director, places faith in the “virtuous circle whereby firms voluntarily adopt the recommendations, investors respond by making clear which disclosures are of particular value, and firms learn by doing as good practice emerges.”  Unfortunately this faith in voluntary disclosure requirements contradicts a substantial body of academic research findings (which are being largely ignored in these policy developments)  – and the statement made by the Minister for Pensions about widespread “lack of attention and outright misunderstanding” on the part of trustees.

Mandatory disclosure on sustainable development risks and opportunities, including climate change needs to come.  Pressure on institutional investors through Defined Contribution scheme pension members will – and needs to – increase.  Switching to sustainable investments is the right thing to do and it makes financial sense.

My response to the Green Finance Inquiry has been published here 

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