A quarter of trustees believe that climate risk management should form a part of fiduciary duty, according to research by LCP.
The consultancy group’s annual survey of pension scheme trustees found that 25% felt that managing systemic climate risk should be part of the role of a trustee.
These respondents agreed that there should be a new interpretation of the fiduciary duty to enable trustees to consider climate and other systemic risks.
A further 44% said considering climate risk in this way was already a route available to trustees, according to the data released on Wednesday.
Aaron Punwani, chief executive officer at LCP, said: “The survey results show that there is support for trustees to have a longer-term view around managing systemic climate risk and for this to be a legally safe interpretation of their duty. Ultimately, schemes have the power to really impact the future.
“Redeploying assets and effective stewardship can change the outlook for climate change, and as an industry, we need to be on the front foot when it comes to how we can best work to facilitate this and encourage a longer-term outlook.”
In February, the Financial Markets Law Committee published a report establishing that trustees can account for sustainability considerations without breaching fiduciary duty.
“If pension fund trustees approach their fiduciary obligations today in the context of sustainability and the subject of climate change and with advice and assistance, their approach can be expected in turn to inform how investees measure success and identify, address and monitor risk and return,” the report stated.
“That (and related increased transparency) may in turn help pension fund trustees still further to meet their fiduciary obligations.”
Net-zero plans progressing
LCP’s research also found that an increasing number of large schemes – those with more than £5bn in assets – have set out strategies for achieving net zero carbon emissions from their investment portfolios.
Similarly, more small schemes with less than £500m in assets have also set targets, the research found, despite there being no regulatory requirement for these schemes to do so.
Punwani said: “It’s good to see that there is an increase in schemes setting net zero targets, even among smaller schemes that have no current requirements in this area.
“But let’s be open about the fact that the current compliance-focused reporting requirements are not going to be of much help to the planet and society unless they are also accompanied by meaningful real-world action, which we believe a re-interpretation of trustee duty would drive.”
LCP noted that, despite recent growth of defined contribution schemes, most UK pension assets were held by closed defined benefit (DB) plans. Many of these were considering a buyout in the short- to medium- term.
In these instances, a trustee board’s primary fiduciary duty is to secure member benefits. The limited range of assets schemes hold in the build-up to an insurance transaction means trustees may feel limited in their ability to influence climate change outcomes, LCP said.
However, LCP emphasised that fiduciary duty included consideration of members’ best interests over the remainder of their lifetime, so that trustees “could and should” legitimately consider outcomes beyond buyout.
Further reading
Clarity on fiduciary duty and sustainability (12 February 2024)
Rethinking fiduciary duty (20 December 2023)
Freeing pension schemes from the straitjacket of fiduciary duty (10 November 2023)
