UK pension trustees commit to action on climate change

The 'Climate Charter', hosted by industry body mallowstreet, is targeted at individuals including chairs, trustees and scheme managers, rather than schemes themselves. Signatories have committed to recommend to their boards that each of the scheme's investments is scrutinised for climate change impact, and that investment managers actively engage with the boards of the companies in which they are invested on climate issues.

Signatories have also committed to develop a set of carbon measurement standards; and to review "and ultimately recommend the termination of" investment managers who do not "support and actively engage in stewarding the transition to a low carbon future".

The signatories note that climate change will "have a material financial impact on every pension fund and all our futures".

The launch of the charter comes ahead of the introduction of new rules requiring pension scheme trustees to disclose how they take account of environmental, social and governance (ESG) factors, including climate change, which may have a "financially material" effect on scheme members' savings.

Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law, said: "With the evidence of climate change building and a global climate strike on the horizon, pension schemes can no longer ignore climate risk".

"But this is about so much more than complying with requirements for the wording of a scheme's statement of investment principles. Trustees have a duty to consider whether the investment risks and opportunities that climate change presents are financially material in the context of their respective schemes and to take appropriate account of those risks and opportunities. Signing up to the climate charter is an important step in acknowledging that duty," she said.

From 1 October 2019, trustees will be required to explain their approach to ESG factors, including climate change, as part of their statement of investment principles (SIP), and to justify any decisions to disregard the long-term financial risks or opportunities of ESG issues. The SIP must also include details of the trustees' policies in relation to the stewardship of investments, such as how they engage with the firms that they invest in and how voting rights are exercised.

Most defined contribution (DC) schemes will also be required to make their SIPs publicly available, and to include a link to the SIP with scheme members' annual benefit statements. A similar requirement applies to defined benefit (DB) schemes from 1 October 2020. DC and DB schemes will also be required to produce and publish an 'implementation report' setting out how they acted on the principles set out in the scheme SIP – from 1 October 2020 for DC schemes and 1 October 2021 for DB schemes. In addition the stewardship reporting requirements for both DB and DC schemes will become more onerous from 1 October 2020.