Feeling the heat
The PLSA has released new guidelines for pension funds aiming to safeguard their investments in a low-carbon future. Luke Hildyard reports.
The climate is changing as a result of human activity – and this will have profound consequences for pension funds’ investments. as such, trustees and 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 funds’ investments in the short-term. A recent report from Cambridge University suggested that portfolios with a similar make-up to that of many pension funds could suffer permanent losses of more than 25 per cent within five years, in the event of a climate-related market shock.
International developments in policy and regulation and in the market for clean technologies raise questions about the viability of the business models of a number of companies in which pension funds are invested.
All UN member states have committed to the Paris agreement, which aims ultimately to limit average global temperature increases to 1.5°C above pre- industrial levels.
While the US’s stated intention of withdrawing from the agreement has led to suggestions that its ambitions will never be fulfilled, a network of 9 states, 227 cities and counties and more than 1,600 businesses in the US have pledged to uphold commitments to the Paris deal. China – a hugely significant player – is investing more than $350 billion in renewable energy networks and introducing a national emissions ‘cap and trade’ scheme as a result of commitments made in Paris.
This has profound implications for industries including the oil and gas, metals and mining, forestry, automobile, food production and retail sectors; plus the service industries – including banking and financial services – serving these sectors. Paul Fisher, the former Deputy Head of the
Bank of England’s Prudential Regulation Authority, has said that a sudden revision to the value of companies in these sectors because of the need to combat climate change is a potential trigger for a financial crisis.
In light of these developments, the PLSA has published new guidelines for pension funds on a programme of measures that they can take to prepare themselves for the decarbonisation of the economy. The guidelines are based on work already being undertaken by many of our members to ensure that they safeguard their investments against climate risk – and to take advantage of the investment opportunities that will emerge in a greener economy.
OUR RECOMMENDATIONS 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; and
- 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 bene ciaries that risks to their incomes in retirement deriving from climate change are being responsibly managed.
Download the guidelines below: