Few corporate pension funds have climate change investment policy

While the majority of the funds do not have specific climate change policies in place, several are creating metrics to measure climate change-related indicators or are actively monitoring the environmental impact of their investment decisions. These include carbon 'footprinting' exercises to assess the emissions produced by the scheme's investments, and similar studies.

The research is based on the top 43 UK corporate pension funds for which figures are publicly available, with a total of £479 billion in assets under management. It comes ahead of the publication of a new report on climate risk and investment co-authored by DWS, Grant Thornton, Redington, the British Antarctic Survey, Bloomberg New Energy Finance and Pinsent Masons.

Only 12% of the funds included in the research actually have a metric in place to measure the carbon footprint of their investments, while none have targets for investment in low carbon or energy efficient assets and none have decarbonisation targets in place for their investment portfolios.

However, funds including the Strathclyde Pension Fund, BBC Pension Scheme and West Midlands Pension Fund have either already carried out, are currently carrying out or are actively reviewing the use of carbon footprinting metrics on their investment portfolios. The Universities Superannuation Scheme has committed to ensuring it is 'underweight' in carbon investments, while the Railways Pension Scheme has commissioned a study on the carbon exposure of both the passive and active elements of its investment portfolio.

Pensions expert Carolyn Saunders of Pinsent Masons said that, in the absence of a standardised approach to climate risk management in investments, most trustees are "unsure how best to deal with the issue". Earlier this year, Pinsent Masons and the University of Leeds published a report on how trustees currently consider climate change as part of their investment strategy.

"Trustees face a number of barriers to climate risk management, including a lack of clear regulations and methodological issues," she said.

"Clarity about trustee duties with regard to climate change is a priority. New regulations will make it clear that sustainability is a relevant consideration to influence the businesses in which trustees invest, whatever their personal views. It is helpful that the government has acknowledged that stewardship activities are likely to be more limited in smaller schemes," she said.

"In practice, general environmental values tend to be a greater driver of a fund's climate risk management than considerations about its financial impact. This suggests that policymakers should focus on conveying the value, in broad terms, of climate risk management, rather than simply focusing on financial risk," she said.

Scheme trustees are not explicitly required by law to consider climate change risk. However, they have a fiduciary duty to take account of any risks that could materially prejudice investment returns. Examples of potential material impacts on investment related to climate change include those posed by actual changes in climate, such as the effect of severe weather on real estate and agriculture, as well as subsequent changes in government policies, which can often be abrupt and radical.

New regulations published by the Department for Work and Pensions (DWP) in September will require trustees to be more transparent about how scheme members' savings are being invested. The new rules, which will take effect on 1 October 2019, will require trustees to explain their approach to so-called environmental, social and governance (ESG) factors, including climate change, when making investment decisions; and to justify any decisions to disregard the long-term financial risks or opportunities of ESG issues.

Last month, the Bank of England's Prudential Regulation Authority (PRA) published a consultation on its expectations of banks and insurance companies when managing the financial risks arising from climate change. Its draft supervisory statement sets out how firms should apply effective governance, risk management, scenario analysis and disclosures to manage the financial risks connected to climate change. The Financial Conduct Authority (FCA) has also published a discussion paper on the impact of climate change and green finance on financial services.