Committee warns ‘complacent’ large schemes over climate change [updated]

Editor’s note: The Environmental Audit Committee has since updated its report, removing Lloyds from its list of “less engaged” schemes. The latest update is here.

Mandatory reporting on environmental, social and corporate governance (ESG) issues by UK pension funds could be a step closer following a parliamentary report that was critical of some schemes’ investment approaches to climate change risk.

The UK parliament’s Environmental Audit Committee (EAC) revealed this week that six of the UK’s 25 largest pension funds, which collectively oversee £550bn (€629bn) of assets, had not “formally considered climate change as a strategic risk”.

Mary Creagh, chair of the EAC, said that “a minority of funds appear worryingly complacent”.

“Pension funds should at least assess the exposure of their assets to the physical, transition and liability risks from climate change that will materialise during savers’ lifetimes,” she added.

Some commentators seized upon the parliamentary report as a further step towards the imposition of mandatory ESG reporting.

“It is inevitable that governments are going to focus on the sustainability of finance within financial institutions and… pension funds are going to be in the sights of the regulator,” said Stuart O’Brien, partner at law firm Sacker & Partners.

“The most likely formal step will be a requirement for trustees to have an ESG policy and report against that,” he told IPE.

He separately questioned the politicians’ description of some schemes as “less-engaged”. The committee published the individual pension funds’ letters to it, in which they set out their approach to climate change.

“When digging a little deeper, I wonder whether this categorisation is really fair,” said O’Brien in a statement. ”Some are likely to have extremely mature investment strategies which probably have only a tiny allocation to equities. These schemes may justifiably be approaching climate change risk in a different way.” 

The EAC’s report comes after the European Commission this week rolled out the latest set of legislative proposals for sustainable finance, including rules governing the disclosure of investments’ impact on climate change – sparking further questions about whether the UK might follow suit.

“If that comes about that would be a real game changer,” said Rachel Haworth, senior policy officer at ShareAction, the London-based responsible investment campaign organisation. “Pension trustees should be thinking ahead to that and getting their thoughts in order.”

For Caroline Escott, defined benefit and investment policy lead at the Pensions and Lifetime Savings Association, climate change was not just an ethical issue for pension fund governance bodies but “a major threat to financial stability”.

“It is therefore imperative that boards and committees consider the potential impact that climate change will have on their investment portfolios,” she said.

Schemes push back against analysis

Of the 25 funds, the committee ranked 11 as “more engaged” – or already taking steps to counter climate change risk – and the remaining eight were deemed “engaged” or “making some progress”.

The six seen as “less engaged” include some of the most established names in the UK pension sector, including the £25bn BP Pension Fund (BPPF), the £20bn Lloyds Bank Pension Scheme and the £14bn Aviva Staff Pension Scheme.

A spokesperson for Aviva said that the “vast majority” of its pension fund was a defined benefits scheme “primarily invested in gilts and therefore has negligible climate risk”.

“The [scheme] is managed by an independent board of trustees and they are actively exploring what more they can do to manage climate exposure,” the spokesperson added.

Lloyds Banking Group Pensions Trustees (LBGPT) was blunter in its assessment of the work undertaken by the EAC.

A spokesperson said the scheme was “surprised by the analysis”, adding that it was “not the case” that it did not consider climate change as a strategic risk.

“The trustee considers climate change risks, and more generally environmental, social and [corporate] governance risks, at multiple levels in the investment decision-making process,” the spokesperson said.

The Lloyds scheme has called on the EAC to publish its full response to the initial request, “rather than the covering letter, which is currently all that is available on its website”, the spokesperson added.

The EAC wrote to pension funds in February to assess the extent to which climate change risk formed part of their investment decision-making processes.

In BPPF’s response to the committee’s initial enquiry, Sir Ian Prosser, chairman of the BP Pension Trustees, said the fund took its role as a responsible investor “very seriously and, as part of this, [considered] a wide range of risks”.

However, in response to a direct question about moves taken relating to climate change risk, Prosser said the fund had “not taken specific actions but we continue to monitor this”.

Any governmental or regulatory implementation of recommendations on climate-risk reporting should adopt a “voluntary approach”, he added.

BPPF had not responded to a request for further comment at the time of publication.

Earlier this year pensions minister Guy Opperman wrote to the EAC outlining plans to introduce a requirement for pension funds to have explicit climate change policies.

Trustees of UK pension schemes are currently required to include within their statements of investment principles details as to the extent, if any, that “social, environmental or ethical considerations” are taken into account in the selection, retention and realisation of investments.