Pension funds playing fast and loose with climate risks

The long-term health of your pension could be at risk due to the widespread failure of trustees to take account of the potential impact of climate change on pension funds, according to a new report from the Association of Chartered Certified Accountants (ACCA) and the Economic Social Research Council.

The report warned that climate change is expected to have a material impact on financial investments over the coming decades due to the increased frequency of extreme weather events and increased costs for the insurance industry associated with global warming.

As part of the study, Professor Jill Solomon from King's College London interviewed 20 pension fund trustees on their awareness of climate change in October 2008, before interviewing 10 of the respondents again this year.

"This first phase research identified a significant lack of awareness, knowledge and understanding within the trustee community regarding the impact of climate change on pension funds," she said, adding that while the 2009 interviews showed some increased awareness of climate risks, this had not been translated into action.

The report also argued that with pension funds holding the largest proportion of shares in UK listed companies of any investment sector, they are in a unique position to promote sustainable low-carbon business models.

John Davies, head of business law and pensions specialist at the ACCA, said pension trustees need to integrate sustainability issues fully into their pension fund governance role. "This is about investment beliefs and improved contractual relationships, not about usurping the roles of investment consultants or fund managers," he said. "The quality of responsible investment must become a significant factor in the awarding and retaining of mandates."

The report recommends the establishment of a climate change code of practice for trustees, as well as more training to help them become aware of climate risks.

However, a number of pension funds are already heavily engaged in assessing climate risks and promoting more sustainable business models. The study comes just days after a group over 180 of the world's largest investors, including a number of major pension funds, issued a formal statement calling on world leaders to agree a robust and ambitious international deal to help tackle climate change.