The UK pensions industry has been hit by a storm of climate investment activity

In the space of weeks a blizzard of potential regulation and mandate action has arrived. 

by Hugh Wheelan | March 6th, 2018

Just when you thought Brexit had sucked all the air out of UK politics, along come a flurry of announcements that tell you that the only other game in town is….institutional climate finance and ESG!

Yesterday, Mary Creagh MP (Labour), Chair of the Environmental Audit Committee (EAC) wrote to the 25 biggest UK pension funds managing £555bn in assets, asking them to report on how they are managing climate risk. The remit of the cross-party EAC is to look at how government policy is working; in this case policy on trustee fiduciary duty and climate risk.

Here’s an example letter sent to Sir Ian Prosser, Chair of Trustees at the Aviva Pension Scheme
The EAC says it will publish all of the pension fund responses, and name those that don’t respond,
which should be a spur to action!

Intriguingly, the EAC has also written to the £500m pension fund for UK MPs. If they respond it would be quite a volte face from their position back in 2015 when RI first picked up the story.

So why is the government doing this? Well, it’s primarily because the response of pension fund trustees to its suggestions to date that they should be considering climate change has been indifferent. As RI reported last week, the UK Pensions Regulator (TPR) has been “disappointed” by the apathy shown thus far to its prompts
The Department of Work and Pensions, yesterday went a bit further in criticism, noting in a report: “We hoped that the publication of guidance on [considering environmental considerations where financially material] by The Pensions Regulator would address trustee confusion about their duties. However, recent research has suggested that a lack of attention and outright misunderstanding remain widespread among Trustees.”

A recent letter from the UK Pensions Minister, Guy Opperman, to the EAC, attempted to clarify the situation and said government action was on its way. Opperman said: “The Law Commission’s 2014 report, Fiduciary Duties of Investment Intermediaries, concluded that trustees of occupational pension schemes already have a fiduciary duty under trust law to take account of any and all financially material risks. Given that there is a broad scientific and public policy consensus that climate change is such a risk, then trustees already have a duty to take account of it.”

The Government, he said, would launch a consultation in May/June this year on policy and regulations, and possibly bring forward legislation clarifying the fiduciary duty issue for Parliamentary approval “at the earliest reasonable opportunity.” He added: “Rather than minor technical amendments, we have committed to introducing regulations which are as effective as possible in delivering the right level of evaluation and consideration by trustees.

” Notably, he said this could include a revision of UK pension fund’s Statement of Investment Principles, to highlight policies on climate change or corporate governance, and make this clear to the public.

Alongside all of this exciting stuff, the UK Parliament, the UK Government and the City of London are all involved in enquiries on promoting green finance.

Mike Clark takes a really interesting look at what’s driving these initiatives in a separate RI article published today. Add to this two of the biggest RI mandates that I’ve ever seen in my time, and you have a rather perfect sustainable finance storm. Yesterday’s RI story revealed that the £40bn (€44bn) LGPS Central pool – one of the eight new super pension pools for local government pensions – had tendered for an asset manager to run a new £2.5bn ‘responsible’ active global equities mandate.

That followed January’s announcement by another pool – the Brunel Pension Partnership worth £28bn (€31.7bn – for clear ESG requirements in pitches by fund managers to run its assets.

Expect to see more of this as the April deadline approaches for the pools to begin operation.
It’s almost enough to make you forget about Brexit…