The weight of opinion that trustees cannot ignore the risk of a warming planet is mounting up, finds Stuart Stone

The impact of climate change on investors could reach trillions of dollars and is something that pension scheme trustees must respond to.


In the last year, both the Economist’s Intelligence Unit and think tank Carbon Tracker have published reports highlighting the vast scale of climate change risk. In addition, Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board, has urged the investment community to recognise the scale of the problem. A legal opinion published last month has added weight to these calls.

The joint opinion from Keith Bryant QC and James Rickards of Outer Temple Chambers, under instruction from ClientEarth, a charity, states that pension fund trustees are both permitted and required to factor climate change risk into their investment decisions.

‘A significant impact’

Their opinion was formed in response to a hypothetical scenario in which a trustee was concerned about the risk associated with climate change and wants to convince fellow trustees and fund managers to take steps to assess and, if necessary, manage those risks.

The law permits and requires the trustees to take those risks into account

They conclude: “If the risks associated with climate change are financially material to a particular investment decision then it is clear, we think, beyond reasonable argument that the law permits and requires the trustees to take those risks into account when making that investment decision.”

This came a day after the European Parliament passed an updated pensions directive. The Institutions for Occupational Retirement Provision II directive requires schemes to factor “environmental, social, and governance risks” into decision-making.

Climate change is something that investors need to take into account

Fergus Moffatt, programme director and head of public policy at UK Sustainable Investment and Finance Association says: “My hope is that this [opinion] will have a very significant impact. Climate change is something that investors need to take into account. The evidence for the financial materiality of climate change is significant and is growing.”

He cited the Economist Intelligence Unit’s 2015 reportThe cost of inaction: Recognising the value at risk from climate change, highlighting that an average temperature increase of six degrees Celsius could destroy $13.8trn of value.

Clear message

These developments are the latest in a series of events that have sent a clear message ringing through the investment community that it’s time to think seriously about climate change risk.

Since 2011, non-governmental organisation Asset Owners Disclosure Project (AODP) has monitored how well the top 500 global institutional investors, including pension funds, are managing climate risk within their portfolios.

In June 2014, a Law Commission report on fiduciary duty clarified the role for trustees in relation to climate change.

The law goes further: trusteesshould take into account financially material factors

It states: “Whilst it is clear that trustees may take into account environmental, social and governance factors in making investment decisions where they are financially material, we think the law goes further: trusteesshould take into account financially material factors.” 

In September 2015, Carney issued a warning that investors face “potentially huge” losses as a result of climate change measures prohibiting the burning of oil, coal, and gas reserves leaving the assets of fossil fuel companies ‘stranded’ in the ground.

Less than a month later Carbon Tracker, published The $2 trillion stranded assets danger zone: How fossil fuel firms risk destroying investor returns.

Recent UN summits on climate change, COP21 in Paris (December 2015) and COP22 in Marrakech (November 2016), have strengthened calls for governments to commit to low carbon economies and sustainable innovation.

What can trustees do?

In the latest legal opinion, Bryant and Rickard state: “As to what action the trustees can and should take if they have decided that climate change is financially material, and that they should take it into account with regard to a particular investment decision, we have reached the clear opinion that what decision the trustees then take as to further action is a matter within their discretion.”

This leaves trustees with a broad range of options, including use of the Association of Member-Nominated Trustees’ Red Line voting initiative– which gives trustees more power over the companies they invest in by providing a set of tightly drawn voting instructions on environmental, social, and governance factors that they can give to asset managers.

Moffatt says: “What’s really important is understanding the fiduciary duties they hold and being able to come to a decision based on that.”

He adds that trustees need to “make clear their views on financially material factors, but also keep up to date with how these views are being reflected within their investment, how their managers are voting.”

Moffatt referenced UKSIF’s “Understanding and applying fiduciary duty” best practice guide for trustees, and outlined that trustees should make extensive reports to stakeholders including how they consider ESG factors and climate change as financially material risk, as well as identifying emerging ESG risks, and getting climate change on their risk register.

The tragedy of the horizon’

Nico Aspinall, chair of the Resource and Environment Board of the Institute and Faculty of Actuaries says the latest opinion is not new precedent.

Trustees can take that Mark Carney framework and ask their asset managers how exposed they are

He directs trustees to heed Carney’s warning of the ‘tragedy of the horizon’. “Trustees can take that Mark Carney framework and ask their asset managers how exposed they are to those different risks.”

There are three broad categories. Firstly, physical risk: are company assets at risk from symptoms of climate change? Assets close to waterfronts could be threatened by rising sea levels, for example.

Secondly, liability risk. Carbon-intensive firms are in danger of being sued by people who have suffered as a result of climate change.

And finally, transition risk. Companies that rely on carbon heavy technologies could find themselves overtaken by rivals that have invested in greener processes.

Aspinall concludes: “The most important thing is really to work out what the plan is to deal with zero carbon emissions by 2050 which is the Cop21 Paris agreement plan.”