UK pension trust aims for ministerial support to reassess duty of care obligations
UK Pension Funds Shift Gears Towards Sustainable Investments
In a significant move for the UK's financial landscape, the Financial Markets Law Committee (FMLC) issued a landmark paper last year, defining climate change as a financially material risk. This new guidance, developed in collaboration with NatWest Cushion and Eversheds Sutherland, has opened up a new chapter for UK pension trustees, clarifying that they can legally consider factors beyond traditional financial returns when making investment decisions.
The announcement was made at a Mansion House event in London on 5 March, marking a turning point in the UK's approach to sustainable investing. The new guidance gives trustees greater flexibility to allocate capital towards private market investments in UK infrastructure, clean energy, and industrial decarbonisation projects.
This shift in investment could support the UK government's growth and decarbonisation agenda, encouraging pension funds to channel billions into renewable energy, low-carbon transport, and industrial decarbonisation projects. The new legal interpretation is prompting UK pension funds to raise their engagement and governance standards towards managing systemic climate risks, particularly in investments related to the energy transition, clean energy, and industrial decarbonisation.
Trustees are increasingly expected to consider climate-related financial risks as material investment factors and align portfolios with emissions reduction goals like those in the Paris Agreement. This drives pension funds to prioritize active engagement with investee companies on emissions reduction and to be selective in capital allocation, favoring low-carbon and transition-aligned sectors rather than simple divestment.
Enhanced Climate Risk Management is a key impact on investment decisions. Trustees are advised by the Pensions Regulator to incorporate systemic climate risks into investment governance, recognizing the material detriment that failing to address these risks can cause to pension scheme funding and obligations.
Active Engagement over Divestment is another significant change. Funds like the Devon Pension Fund prioritize engaging companies for real emissions reductions, using climate metrics, carbon footprinting, and monitoring fossil fuel exposure to push companies toward cleaner energy practices. Selective divestment may occur only when companies fail to demonstrate alignment with climate goals.
The increasing focus on Decarbonisation is evident in investment decisions, which increasingly favour sectors and companies positioned well for the transition to a low-carbon economy, such as renewable energy utilities, supported by scenario analyses and climate-related metrics.
The Legislative and Funding Environment is also evolving to support this transition. The Pensions Protection Fund (PPF) is adjusting its levy policies to reflect better funding positions, potentially freeing pension schemes to reallocate funds into growth and transition-supporting investments, thus indirectly supporting clean energy and decarbonisation projects.
Torsten Bell, the newly appointed pensions minister, has expressed support for this new guidance. Julius Pursaill, strategic adviser at NatWest Cushion, argues that trustees have been at a disadvantage when allocating capital and that the Eversheds opinion clarifies that they can create societal infrastructure in the UK.
With pension schemes collectively managing £3trn in assets, even a small reallocation of capital towards green investment could significantly accelerate the UK's transition to net zero. However, trustees must still take their own professional advice and be satisfied with the robustness of the investment case. They will still need to justify their investment decisions in line with Section 36 investment advice requirements and ensure they meet long-term return expectations.
The new legal advice challenges the notion that pension funds must take a narrow view of risk-adjusted financial returns. Instead, it provides a legal basis for trustees to consider the long-term impact of investments on members' retirement, including access to clean energy, healthcare, infrastructure, and a strong economy.
NatWest Cushion, a master trust, has been one of the first DC investors in climate solutions and has pledged to invest 5% of its default fund in private markets as part of the Mansion House Pledge. This move is expected to set a precedent for other pension funds to follow suit, potentially leading to a seismic shift in the UK's investment landscape.
[1] - FMLC (2021). Climate change as a financially material risk: legal issues for asset owners and asset managers. [2] - NatWest Cushion (2021). Mansion House Pledge: Investing in the UK's Energy Transition. [3] - Pensions Protection Fund (2021). Levy policy consultation 2021. [4] - UK Government (2021). The Ten Point Plan for a Green Industrial Revolution. [5] - Eversheds Sutherland (2021). Legal opinion on the duties of pension trustees in relation to climate change.
- The new legal opinion from Eversheds Sutherland, in collaboration with NatWest Cushion and the Financial Markets Law Committee (FMLC), has empowered UK pension trustees to consider environmental-science factors, such as climate-change, when making investment decisions.
- Pension funds are increasingly prioritizing renewable-energy and clean-energy projects, as part of the UK government's growth and decarbonisation agenda, by channeling billions into these sectors.
- In the UK, the business of investing is evolving, with trustees allocating capital towards private market investments in infrastructure, energy transition, and industrial decarbonisation, in line with environmental-science goals.
- Financial institutions like NatWest Cushion are leading the charge, as they've pledged to invest 5% of their default fund in private markets, focusing on climate-change solutions, setting a precedent for the industry.
- The shift in UK pension funds' approach to sustainable investing, particularly in sectors like renewable energy and clean energy, could have a substantial real-estate impact, potentially accelerating the country's transition towards a low-carbon economy and net-zero emissions.
