Pension schemes: the new climate protectors?

There is increasing focus on climate-related investment by pension schemes, an area that appears to be undergoing significant change. There have been a number of recent developments, not least of which is the proposed change to the pensions legislation in the UK Pension Schemes Bill ('the Bill'), which is currently working through Parliament and is expected to be passed into law by the end of this year.

A clause in the current draft Bill will allow regulations to be passed requiring pension-scheme trustees to consider and report on climate-change risks in relation to their investment strategy. The Department for Work and Pensions launched a consultation on the proposed regulations in August 2020, which closed in October. 

The relevant clause in the Bill was much praised during its second reading in the House of Commons as one of the first of its kind to be introduced by any government globally. A number of speakers felt that the new clause was an important step in helping the Government to meet its target of reaching carbon net zero by 2050. Pension funds were described as having a significant part to play in tackling climate change because of the size of their combined investment power. Conservative MP Duncan Baker perhaps went furthest in his proposed 'headline' for the Bill: 'if you want to save the planet, start a pension'.

By contrast, the opposition Labour party has argued that the Bill as drafted does not currently go far enough in tackling climate change, and recently proposed an amendment to the Bill that would have imposed significant changes to pension schemes’ investment strategies by requiring their trustees to align their investment policy with the Paris Agreement. 

In a similar vein, the charity ShareAction proposed earlier in November a new bill on 'responsible investment' that would also have provided that funds must align with the Paris Agreement. 

However, the Labour amendment to the Bill was voted down during the Bill’s third reading in the House of Commons, due to concerns that:

• trustees might feel that they were required to disinvest from non-climate friendly companies, which was felt to be counter-productive in addressing climate change, since as shareholders (or potential shareholders), trustees would have significant influence in encouraging companies to work towards climate-related targets; and
• the amendment could create difficulties for trustees acting consistently with long-established duties under English common law – there is considerable ongoing debate on the scope of trustee duties in respect of mitigating climate change.

Nonetheless, attitudes to climate-related investment by trustees seem to be changing. Two major pension providers have recently announced plans to achieve carbon net zero in their scheme assets. Aviva has announced that it plans to ensure that its auto-enrolment default fund will reach carbon net zero by 2050, with the potential to meet this target sooner. Similarly, the BT pension scheme (BTPS), the largest corporate pension scheme in the UK, has set an ambitious target of reaching a carbon net-zero asset portfolio by 2035. 

Although the legal basis on which the schemes have made these decisions has not been made public, it is likely that these targets are considered to be financially beneficial by the scheme trustees. The announcements demonstrate that there is appetite in the pensions market to move towards greener investment strategies, and this is supported by a number of recent consumer polls that indicate that savers are increasingly concerned about climate-change issues.

In an important development that has attracted much attention, a case was recently brought in Australia by a scheme member against the trustee of his superannuation fund for alleged inadequate disclosure of risks of climate change, and for alleged breaches of their duties to invest with reasonable care and skill in relation to climate change factors. 

As our recent blog post describes, McVeigh v Retail Employees Superannuation Trust (REST) was viewed as a significant test case around the world given the potentially wide implications for climate-related investment – and as Australian trust law is broadly built on the principles of English law, the English courts could have treated the case as having persuasive authority. 

The case settled before it was heard by the Federal Court of Australia so that there were no final court findings on the claims, which means there remains no judicial consideration of the issues this case presented. However, the settlement that was announced was significant in itself in that REST, a major industry-wide superannuation scheme with approximately A$58.2bn of assets, published a statement undertaking to, among other things:

• achieve a net-zero carbon footprint for the fund by 2050;
• measure and report in line with the recommendation in the Task Force on Climate-Related Financial Disclosures (TCFD); and
• actively engage with its investee companies, investment managers and advisers to work towards the climate goals of the Paris Agreement and the TCFD.

As with the investment strategies announced by Aviva and the BTPS, it appears that the REST trustee came to the view that these ambitious targets were consistent with its duties to invest in the financial interests of the scheme beneficiaries. Taken together, these legal developments are likely to encourage other pension scheme trustees to consider similar changes to their investment strategies.

It is clear that this is a key area to watch. In the UK, it will be interesting to see where the Bill lands on climate change in its final form, and the effect that the proposed reporting requirements will have in the pensions industry.