PMI - Climate Change - Legal implications for pension funds and their advisers

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  • 06 mins 28 secs
Daniel Wiseman, Lawyer (Australian qualified), Company & Financial Project, ClientEarth discusses climate change and laws that govern pension funds, implications for not following these legal duties, challenges that Brexit poses for the law, and practical steps trustees can take to ensure they meet their legal duties.


The Pensions Management Institute

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While all information communicated by ClientEarth and Daniel Wiseman in this interview is obtained from sources believed to be accurate and reliable, ClientEarth and Daniel Wiseman do not accept responsibility for any errors, omissions, or inaccurate information or any decisions made in reliance on this interview or transcript. The information communicated in this interview is not offered as advice on any particular matter and must not be treated as a substitute for specific advice. In particular, information communicated in this interview does not constitute legal, professional, financial or investment advice. Advice from a suitably qualified professional should always be sought in relation to any particular matter or circumstances.

PRESENTER: Climate change, what are the legal implications for pension funds and their advisers? Well with me today to discuss I’m joined by Daniel Wiseman, lawyer for ClientEarth. Well Daniel, good to have you with us today.

DANIEL WISEMAN: Thank you, great to be here.

PRESENTER: So let’s start with climate change in the context of laws that govern pension funds. Now, what exactly is it the law says, and what kind of concern should this be for trustees?

DANIEL WISEMAN: So the law is now quite clear on what is required from trustees of DB pension funds. The TPR has stated quite clearly that trustees have to act in the best interests of scheme members. That requires them to take into account all financially material factors that might be relevant to their decisions. And they’ve also made clear that climate change might be and probably will be a financially material factor for many pension schemes in the UK. So that we believe makes it very clear that trustees of DB pension schemes in the UK now at least need to be considering whether climate change is a risk for their scheme. So, on the contract-based side I think the legal position hasn’t been quite as clear from the regulator. But if we’re to take seriously their statements that they plan to have a joined-up approach to the Pensions Regulator I think we can expect this to be more joined up in the future.

PRESENTER: And does the law apply to others? I’m thinking financial advisers. And what are the implications for failing to exercise legal duties?

DANIEL WISEMAN: Yes. So I think we’ve recently put out two new reports highlighting what the consequences or legal risks might be for professional advisers who are advising these pension schemes. And we think that there’s quite a clear argument that if trustees or managers of pension funds must be considering climate change when they’re making decisions, those who are advising them, such as actuaries and investment consultants, they will also have legal duties to consider those issues when they’re providing their own advice. For both trustees as well as their professional advisers, where they’re failing to address these issues, despite what the law now requires, we do think there are developing and growing genuine legal risks and regulatory risks where they fail to do so.

PRESENTER: Well there must be widespread confusion about the legal duties when it comes to tackling climate change. Do you think perhaps the law needs revising?

DANIEL WISEMAN: One of the things we’ve seen when we’re talking to trustees and managers of pension schemes is that there are definitely misconceptions about what the law requires. Despite what we see as quite a clear legal landscape now, there’s definitely a bit of uncertainty around what exactly the legal implications of climate change are for pension fund schemes. Some of the common misconceptions that we see are firstly around whether or not climate change is actually a material financial issue. Often it’s still categorised as an ethical concern which is beyond the remit of trustees or pension fund managers. The second misconception we see is that trustees often say that they’ve delegated their duties around managing climate risk by mandating their asset managers and that their asset managers should be considering these issues rather than the trustees themselves. And the third misconception that we see is that ultimately scheme members shouldn’t be worried about these issues, because the Pension Protection Fund will be standing behind any losses that the scheme might suffer anyway, and so ultimately any losses related to climate change will be borne by the taxpayer.

PRESENTER: And the UK’s exit from the EU, what sort of challenges will that pose for the law?

DANIEL WISEMAN: Sure, so the UK framework for pensions legislation is obviously it’s UK-based legislation, but it does take shape and inspiration from the EU requirements and EU regulations and EU directives. And so there is obviously some consequences of the UK’s departure from the EU, but in the immediate term there won’t be any major impacts. I think the IORP II directive, which has been passed and introduced by the EU, will be most likely brought in through relations in the UK regardless of what happens around the timing of Brexit.

PRESENTER: So what practical steps can trustees and others be taking to meet their legal duties?

DANIEL WISEMAN: Sure. So I think the first thing really relates to governance for trustees. Firstly, they need to be educating themselves and understanding what the financial implications of climate change are for their duties and their responsibilities. They need to be talking with their professional advisers, and seeking clarity and advice from them, and making sure that climate change related risks end up on agendas with the trustees. And they also need to be making sure that they include, they assess whether climate change is a financially material risk for their scheme, and if it is they need to be including it on their statement of investment principles and their scheme documentation.

PRESENTER: So what work have you been involved in to make sure these duties are being met?

DANIEL WISEMAN: Sure. So over the last year or so we’ve been working with another organisation called ShareAction, which is a shareholder representative organisation, and we’ve been working with them and members of schemes to write to their pension schemes to ask them what the scheme is doing about climate change and how it’s managing the risks. Over the last six months or so, we’ve pulled those responses together and we’ve sent through a referral to the Pensions Regulator highlighting some of the misconceptions that we’ve identified throughout that process. The Pensions Regulator has followed up on those referrals and is investigating with those pension schemes, and we’re continuing to engage with them in relation to that. We’re also now looking to replicate some of that work with the Financial Conduct Authority as well.

PRESENTER: Daniel, thank you.

DANIEL WISEMAN: Thanks very much.