As part of LCP’s annual survey of pension scheme trustees, which will be released in full this month, 25% of trustees surveyed said there should be a new interpretation of the fiduciary duty to enable trustees to consider climate and other systemic risks. A further 44% said that they believe considering climate risk in this way is already a route available to trustees.
The survey results also show that the number of large schemes (over £5bn) that have set a net zero target has increased from last year, perhaps influenced by the TCFD reporting rules that they now have to follow. Furthermore, the survey reveals that there has been an increase in the number of smaller schemes (under £500m) that have set a target despite the fact there is no regulatory pressure to do so.
LCP’s CEO Aaron Punwani has been leading industry calls to update the current interpretation of what trustees’ fiduciary duty is to enable them to take a long-term approach.
LCP notes that currently, the majority of UK pension assets are held by closed Defined Benefit (DB) pension schemes, many of which may be considering a buy-out in the short to medium term. In instances like these, a trustee’s primary fiduciary duty is to make their own members’ benefits secure. The fact that their holding in growth assets is both small and temporary means they may feel limited in their ability to influence climate change outcomes.
Clarifying that fiduciary duty includes consideration of members’ best financial interests over the remainder of their lifetime, so that DB trustees can and should legitimately consider outcomes beyond buy-out, would help to combat this. Reinterpreting the duty to say that trustees should have regard to the real-world impact of their investment decisions, not just the impact that external factors – such as climate change – have on their scheme’s investments, would also help to shift changes in behaviour.
Aaron Punwani, LCP CEO, commented: “It’s good to see that there is an increase in schemes setting net zero targets, even amongst smaller schemes that have no current requirements in this area. But let’s be open about the fact the current compliance-focused reporting requirements are not going to be of much help to the planet and society unless they are also accompanied by meaningful real-world action, which we believe a re-interpretation of trustee duty would drive.
“The survey results show that there is support for trustees to have a longer-term view around managing systemic climate risk and for this to be a legally safe interpretation of their duty. Ultimately, schemes have the power to really impact the future. Redeploying assets and effective stewardship can change the outlook for climate change, and as an industry, we need to be on the front foot when it comes to how we can best work to facilitate this and encourage a longer-term outlook.’’
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