ClientEarth pensions lawyer Natalie Shippen congratulated the government on the move. She said: “Even though the law is already clear, those in charge of our savings are overlooking one of the biggest risks out there. This had to be resolved and we are delighted DWP has stepped up to make expectations clear.
“Environmental, social and governance (ESG) factors are often financially material but many trustees understand these two concepts to be mutually exclusive. Explicit clarification in UK pensions law of trustees’ duty to assess ESG factors - where these are financially material – will sweep confusion over climate risk off the table.
“There is a mammoth sum of money tied up in pension funds and the way this is invested has a huge influence on how quickly we move to a low-carbon economy. This reform will empower trustees to consider climate risks and make investment decisions in line with the energy transition.”
DWP’s move is the crest of a swell of developments over the last decade around pensions and climate. Last year, EU leaders agreed the IORPS II Directive, which will require pension funds to take into account climate-related risks. This was followed by a QC opinion that agreed trustees would not be properly exercising their powers if they failed to manage climate change where it is found to be a material financial risk. And just this month, the Pensions and Lifetime Savings Association (PLSA) issued comprehensive guidance on taking climate risk into account in investment decisions.
But a recent survey by industry magazine Professional Pensions revealed many trustees are still in the dark about the fact that environmental, social and governance (ESG) issues often pose financially material risks to funds. The Pensions Regulator (tPR) has previously urged trustees who think ESG issues were not significant to “wake up and smell the coffee”.
The proposed reform will also impact contract-based pensions, making investment practices consistent across the industry where ESG risks are concerned. So far, the Financial Conduct Authority (FCA), which is responsible for contract-based schemes, has remained reticent on climate risk, despite explicit recommendations from the Law Commission. ClientEarth’s lawyers believe the reform will prompt much-needed action from the regulator.
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