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More light, less heat: A framework for pension fund action on climate change

The climate is changing as a result of human activity – and this will have profound consequences for pension funds’ investments. As such, governance bodies must take steps to prepare for the economic ramifications of climate change. 

While climate change is commonly thought of as a long-term issue, potentially hitting global GDP by 50 per cent by 2100, there is also a serious risk to pension fund’s investments in the short-term . A recent report from Cambridge University found that in the event of a 2°C increase, portfolios with a similar make up to many pension funds could suffer permanent losses of more than 25 per cent within five years after the shock is experienced. 

Senior figures from the Bank of England and The Pensions Regulator (TPR) have also warned of the threat to financial stability posed by climate change. Indeed, guidance from TPR makes clear that pension fund governance bodies should consider the impact of climate change on their investments. 

As such, the PLSA has developed new guidelines for pension funds, on a programme of measures that they can take to prepare themselves for the decarbonisation of the economy.

These measures include: 

  • Incorporating climate change expertise onto trustee boards and other governance bodies 
  • Reviewing how current and prospective asset managers consider climate change as part of their investment decisions, and incorporating this into manager selection processes
  • Instructing asset managers to engage with investee companies with regard to their plans to mitigate and adapt to climate change
  • Reporting on their management of climate change-related risk to beneficiaries, using the reporting framework recommended by the Financial Stability Board’s Task Force on Climate Related Financial Disclosures (TCFD) 

We hope that the guidance will help governance bodies and give confidence to beneficiaries that risks to their incomes in retirement deriving from climate change are being responsibly managed.