Defined benefit investment (DB) consultants and actuaries could face legal action over failing to address climate change risks in advice. The Pension Regulator’s guidance on DB investment stated that trustees should take environment, social and governance factors into account if they are financially significant.

The risk of litigation is rising. If there are links between financial losses and climate risk factors actuaries have failed to consider these issues and have therefore not given any advice. The trustees of DB schemes then become targets for re-compensation.

Rosalind Connor commented:

“It is pretty clear that the law requires trustees to invest in the way that improves returns. This means that if, for instance, the best investment for the trustees in terms of the required risk profile and returns is something hideously polluting, that is where the trustees should (by law) invest.”
Also, the requirement for a statement of investment principles to set out how ‘social, environmental or ethical considerations’ are taken into account in investments is not binding, she added.

Therefore, she argued, the potential penalties for an investment consultant or actuary for giving poor advice on climate risk to trustees are not high.
“So long as advisers can show that they honestly held a belief in the position they held, they cannot be challenged legally. There are a vast number of factors advisers take into account, and not giving sufficient weight to one would not usually be enough to put the adviser at risk,” Rosalind continued.
While Rosalind is not convinced there has been a significant breach of the law by advisers on climate risk, she can see reasons why the law might need to be looked at again.

“There is an underlying tension with pension schemes between the requirement to invest for the benefit of the scheme and the wider issue that pension schemes are very significant investors and many parties, including charities, pressure groups and government bodies, want them to invest in certain ways,” she explained.

The problem with the most substantial documents relating to duties of trustees and their advisers towards climate risk of recent years is that they are only advisory and not legally binding.

For instance, the Law Commission’s report, Fiduciary Duties of Investment Intermediaries in 2014, made many recommendations.
According to the report, there is scope for trustees to take ethical and environmental, social and governance (ESG) issues into account where it is “financially material” to the scheme but there is no follow through legally.

Therefore, Rosalind thinks it might be right to look at the law again at some point in the future. “There is perhaps a policy question about whether the law relating to trustees’ duties on investments should be fundamentally changed on this issue. If it is not, then the arguments raised by ClientEarth and many other equally laudable organisations lack legal power,” she said.

Read the full article in Professional Pensions here