ClientEarth has issued a warning the UK’s 12 largest pension funds that they potentially risk flunking their legal duties unless they take climate risk more seriously in their financial decision-making.
In letters sent to executives at a dozen pension funds, the environmental NGO argued investment managers have a fiduciary duty to ensure their savers’ money is not put at risk by supporting fossil fuel companies and activities.
The letters, which were published by ClientEarth on Wednesday, urge pension fund trustees to stop providing capital through bond purchases to energy companies engaged in fossil fuel activities unless these firms begin to follow through on credible climate transition plans.
To do that, pension fund trustees need to develop most effective climate engagement strategies with fossil fuel companies they invest in, according to ClientEarth.
“Fossil fuel projects have a high chance of being rendered obsolete in coming decades as the world’s energy system transitions to renewables,” explained ClientEarth lawyer Catriona Glascott. “Pension beneficiaries are having their funds thrown behind risky projects for potential short-term profits – a strategy that risks undermining long-term reward for customers.
“Pension schemes – which promise a secure future in principle – have the chance to make that both a planetary and material reality for beneficiaries. They can make bond financing dependent on climate commitments and ensure that credible company transition plans are a condition for investment.
“These funds have an enormous opportunity before them. By attaching climate terms to bonds, they can help turn the tide of the energy transition and reduce their own legal risk.”
While many pension schemes have committed to building net zero portfolios and claim climate change underpins investment strategies, UK pension funds have around £88bn invested in fossil fuels, almost a quarter of which is invested through bonds, according to the Make My Money Matter campaign group.
Meanwhile, the Toxic Bonds Initiative campaign has estimated that bonds are the largest source of financing for coal in China and India.
ClientEarth’s letters this week comes amid an “explosion” in climate-related litigation against corporate climate commitments, product claims, overstated investments or support for climate action, and failure to disclose risks, with case numbers almost trebling since 2020, according to an academic study earlier this year.
Commenting on the letters, Joe Debrowski, deputy director of policy at the Pensions and Lifetime Savings Association (PLSA), argued pension funds took their ESG (environmental social governance) and individual commitments “very seriously”.
“According to a recent PLSA survey, more than two-thirds of funds have already committed to achieving net zero status,” he said. “Among these commitments, an impressive nine out of 10 funds are targeting compliance by 2050. Notably, 14 per cent are ambitiously aiming for 2035, while an additional 18 per cent are diligently working towards the 2035-2040 period.
“At the core of these ambitions lies a recognition of fiduciary duties, which compels schemes to assess climate risks, including associated legal implications, given their long-term investment perspective,” Debrowski added.
“There is also enthusiasm for green transition strategies and investment opportunities that not only align with their values but also foster the future economy’s growth trajectory.”
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