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Pension fund trustees: a wake-up call on climate change

This month’s guest article is by Professor Jill Solomon, Department of Management, King’s College London

There is global scientific consensus that climate change is progressing far more rapidly and with far greater severity than previously anticipated. Climate change is a critical issue for business, for financial institutions and not least for the pension fund industry. Corporate financial performance across all sectors is being substantially affected by climate-induced risks. Companies are also embracing profitable climate-related opportunities. These effects feed directly into pension fund returns to investment, as pension funds are heavily invested in company shares.

Two new studies of pension fund trustees’ attitudes towards climate change, its potential impact on their pension funds, and their response to this challenge have recently been published by ACCA1 The first report2 resulted from interviews with 20 trustees, mainly from the pension funds of FTSE100 companies. The report finds that the majority of trustees are not engaging actively with their fund managers or with their members on climate change risks and opportunities, and their potential to affect investment return.

Although trustees appear generally interested in climate change as an issue they seem to be experiencing difficulty in appreciating links between pension fund performance and climate change, despite the growing evidence from the practitioner literature. Indeed, they are overwhelmingly unaware of leading professional publications on the materiality of climate change risks and opportunities for the investment community and even specifically for the pension fund industry. Professional reports aimed specifically at pension fund trustees have explicitly identified climate change as a material risk for pension fund investment and have strongly recommended trustees to adopt an active role in this area. Leading reports have highlighted climate change as part of a trustee’s fiduciary duty.

The trustees identify a number of obstacles which they believe prevent them from dealing with climate change under the remit of their role and responsibilities, including: lack of time; lack of knowledge within the trustee community; lack of evidence on the impact of climate change on pension funds; lack of reliable data on climate change impacts, lack of guidance for trustees; lack of member interest and overall, a lack of understanding regarding the materiality of climate change risk for the pension fund community.

The second report3 involved returning to ten of the trustees already surveyed to ascertain their views on climate change in the wake of the global financial crisis, twelve months following the first research. Although the trustees feel their views about the impact of climate change on their fund have not changed substantially, there is some evidence from the second round of interviews that their level of awareness of climate change risks and impact has risen.  The most notable difference is in their engagement activities. Trustees are starting to engage with their fund managers on climate change, by at the very least asking what their climate change strategy is with investee companies. The trustees had also in some cases invited their fund managers to attend trustee meetings and explain how climate change was affecting their members’ investment. However, engagement with members does not appear to have moved on to any degree.

One surprising outcome from the second survey is that the global financial crisis appears to have heightened trustees’ interest in climate change rather than dampened it. As one commented,

“…what the global financial crisis has highlighted is how fast, how quickly, how deep change can be, and how our worlds can be turned upside down”

Several trustees believe the climate crisis could be similar to the financial crisis in the sense that one day the world is functioning normally whereas the next there has been a catastrophic event.

The second survey also revealed some other impediments to trustees incorporating climate change into their role and responsibilities, including: the passive approach of the trustee community; the composition of the trustee board; presence of climate change sceptics among the trustee community; and excessive pension fund regulation. Trustee board composition was an interesting issue, as interviewees felt that older (often retired) board members were uninterested in any long-term investment issues and were often resistant to ‘new’ issues for engagement, such as climate change.

The trustees themselves made a number of recommendations for improving the consideration of climate change in pension fund investment such as: a continual programme of training for trustees to raise awareness; greater engagement between themselves and their fund managers on climate change and its effects on the funds; a more joined-up approach to climate change between the pension fund and the sponsor company.

Both reports conclude that there is an urgent need for trustees to engage with fund managers, members and Government to formulate guidelines for the trustee community on climate change considerations. The reports advocate a code of practice on the trustees’ role and responsibilities regarding climate change, or at least a set of guidelines for trustees which explain the urgent need for climate change to be considered by the trustee community, and then lay out the actions and engagement required from trustees. Although there is evidence of improvement in trustees’ attitudes and activities regarding climate change, this does not go far enough and greater attention needs to be paid urgently to this material aspect of pension fund investment to avert an imminent disaster for pension fund performance which could emerge, as climate change progresses, unless funds are protected adequately.

Links

Professor Jill Solomon
Department of Management
King’s College London
University of London
Franklin-Wilkins Building
150 Stamford Street
London SE1 9NH
Direct Line Phone and Fax: +44 (0)20 7848 4531

Email: jill.solomon(at)kcl.ac.uk (replace at with @)

1. RR106 – Pension Fund Trustees and Climate Change

2. Solomon, J. F. (2009) Pension Fund Trustees and Climate Change, ACCA Research Report No.106.

3. Solomon, J. F. (2009) Pension Funds and Climate Change: One Year On, ACCA Discussion Paper, September.

What do you think?