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Sharp growth in number of pension funds weighing financial climate risks

The number of pension funds considering the financial risks of climate change has more than tripled in a year, according to a new study.

In its 2018 European Allocation Report, consultancy group Mercer reported 17% of European pension schemes were now thinking about the financial impact of climate change – up from 5% in the firm’s 2017 survey and 4% in 2016.

Phil Edwards, Mercer’s global director of strategic research, said: “Nudges by the UK’s Pensions Regulator, the European Commission and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures [TCFD] are driving increased engagement.”

However, at 17% of respondents, there was still further to go in terms of serious investor engagement here, he added.

“We expect the industry-led approach of the TCFD to continue to drive awareness of the issue,” Edwards said.

Kate Brett, principal in Mercer’s responsible investment team, said a proactive approach to consideration of environmental issues could “open up investment opportunities in the green fields of the low carbon economy”.

Inactivity on the part of pension schemes, however, brought risks from stranded assets and physical climate risks, as well as reputational risk, she said.

“Given increasing regulatory involvement and public concern about climate change, it may be that in time a lack of consideration of ESG risks will be seen as a breach of fiduciary duty,” Brett warned.

In the Mercer study, 34% of survey participants said regulation was the main factor in encouraging them to consider ESG risks, while 25% cited the financial materiality of ESG risks, and 18% put it down to the views of individual trustees and reputational risks.

One in 10 of those polled cited the need to align investment strategy with their sponsor’s corporate social responsibility strategy, Mercer said.

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