UK- The pensions industry needs to recognise the long-term impact of climate change and adapt their asset and liability management strategies accordingly or they face an uncertain future, according to a report by UK merchant banking group Climate Change Capital.
The report ‘Impacts of climate change on financial institutions' medium to long term assets and liabilities’ argues that current financial models and assumptions do not adequately budget for climate change, leaving investments exposed to “significant” risks in the long term.
It also says that climate change might influence the obligation on trustees and fund administrators to be prudent investors and suggests that the definition of their fiduciary duties be extended to incorporate climate change and related issues.
Pension funds will face risks such as “direct physical impact “ on assets; while catastrophe reinsurance and insurance claims will worsen, the study says.
It also reminds that regulations mitigating climate change, such as the Kyoto protocol, will impact on greenhouse gas emissions sectors, such as oil, gas and energy, in which the pension industry is a major investor.
Louis Perroy, an actuary with Climate Change Capital and author of the report said: "Climate change poses one of the most significant risks to the pension industry”.
Pension funds could progressively allocate to investments that participate in the mitigation of climate change, such as renewable energies or low carbon technologies, Perroy suggested.
“As a major investor in the UK stock market, pension funds are in a position to make a real difference” he said. He added that although traditionally pension funds have not invested in small and medium sized enterprises there could be a “balance shift" to smaller climate change mitigation companies.
The report, which will be presented to the Institute of Actuaries on 14 June, is available from Climate Change.
Peter Scales, chief executive of the £3bn (€4.33bn) LPFA London Pensions Fund Authority told IPE: “Many pension funds in the UK and overseas appreciate the potential impact of climate change-risk and the opportunity as investors and are seeking through collaboration to raise the profile of these issues throughout the investment decision process.”
Scales also chairs the Institutional Investors Group on Climate Change, IIGCC, a forum involving pension funds and other institutional investors on issues related to climate change.
Members include the BBC Pension Trust, Greater Manchester Pension Fund and asset managers like BNP Paribas Asset Management. The group has just produced a four-page prospectus on its activities.
He will speak on behalf of the pension fund and the association at the Institutional Investors Summit on Climate Risk, which will take place in New York on May 10.