Defined benefit investment consultants and actuaries may be legally bound to advise on material climate change risk, according to new research.
A report by environmental law firm ClientEarth states that trustees are legally required to respond to climate change risk that may have a material impact on the scheme.
The findings on DB advisers, also compiled by ClientEarth, enter the environmental, social and governance debate with the EU's Institutions for Occupational Retirement Provision directive on the horizon. IORP II will have to be transposed into UK law by January 13 2019.
Where it is financially material, they have to manage it. This necessarily has implications for the legal duties of the professional advisers
Daniel Wiseman, ClientEarth
IORP II will place more stringent expectations upon DB pension schemes in relation to ESG. Their advisers may also now face further scrutiny over their attention to climate change risk.
Actuaries have clearer guidelines than investment consultants
Actuaries and investment consultants are subject to respective industry standards concerning due diligence over investments and duty of care to clients. These may include expectations over climate change.
Daniel Wiseman, a lawyer at ClientEarth, said: “It’s now clear that trustees have legal duties to, at the very least, consider the implications of climate change for their pension scheme.”
He added: “Where it is financially material, they have to manage it. This necessarily has implications for the legal duties of the professional advisers.”
Wiseman observed differences in the level of regulatory focus placed upon actuaries and investment consultants, arguing that guidelines were clearer for actuaries.
However, "the [Financial Conduct Authority] has been quite clear that they’re looking at bringing investment consultants within the regulatory perimeter”, he noted.
“Actuaries, on the other hand, already have quite clear professional standards and duties,” he said, with regulatory oversight from the Institute and Faculty of Actuaries or the Financial Reporting Council.
Trustees hold ultimate responsibility
The extent of specific trustee responsibilities over ESG remains unclear. Scott Edmunds, senior investment consultant at Quantum Advisory, disagreed with Wiseman on the legal responsibilities of trustees in relation to climate change.
“My understanding is that trustees don’t have a legal obligation to explicitly focus on climate change factors, but do have an obligation to consider risks that would materially financially impact the scheme,” he said. This could include climate change, he added.
The Occupational Pension Schemes (Investment) Regulations 2005, section 4.2, enshrines the requirement for trustees that “the assets must be invested in the best interests of members and beneficiaries”.
Ralph McClelland, partner at law firm Sackers, said that responsibility for investment strategy sits with the trustees.
On investment consultants, he said: “The argument that might be made is... have the consultants done enough to help the trustees give a reasoned and fair consideration of ESG-type risks?”
The law needs to be clearer
The division among experts over the legal duties of schemes and their advisers suggests a need for greater clarity in current legislation.
Ingrid Holmes, director at sustainable development thinktank E3G, called for climate-focused revisions to existing regulation.
Companies increase use of carbon pricing
Research by environmental data provider CDP indicates an eight-fold rise in the number of companies around the world putting a price on their carbon emissions.
These included the EU’s Solvency II directive, which primarily regulates the amount of capital that insurance companies must hold to reduce insolvency risk, and the Market in Financial Instruments Directive II, which seeks to improve transparency across asset classes.
“On the supervisory side, there’s a bit of a discussion going on at the moment about whether we need to explicitly set the climate risk piece into the supervisors’ mandate as a regulatory change, or whether we should just be pointing it out to them,” she said.
“We are seeing a rise of legal challenges around climate change,” she added.
“But we’ve also seen investors sue corporates” for not properly accounting for risks, she said, noting that legal clarification on the issue "could lead to a whole range of new legal liabilities clearly emerging”.
This article has been updated since original publication to clarify the remit of investment consultants
