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Pension Fund Trustees: Ignoring Climate Change is No Longer an Option

Ignoring climate change is no longer an option for pension fiduciaries given the overwhelming scientific consensus about the causes and implications of global climate change.

As much as 10% of a fund’s portfolio risk exposure within the next twenty years, will arise from climate change and its effect on technology, resource availability, and regulatory and other impacts, according to the 2015 update of the Mercer Report.[1]

Climate change will unequivocally have an impact on investment returns such that it needs to be regarded as a new return variable.”    – Mercer Report, 2015 [2]

Pension plan trustees, in particular, have a fiduciary duty to provide a retirement income for employees upon retirement. According to BC’s new Pension Benefits Standards Act, plan investments must take into account the plan’s liabilities, and must not be unduly risky.[3] If climate change is relevant to an investment, it must be considered.[4]

The two most significant categories of risk introduced by climate change that pension fund trustees must address are: [5]

  • The physical risk of destroyed assets or assets with diminished value. This includes coastline real estate, drought- or flood-vulnerable assets, and sectors that depend on weather predictability, such as agriculture and insurance.
  • The regulatory risk of stranded assets or assets with diminished value. There is an extreme likelihood of government restrictions on the use and production of fossil fuels considering the significant international concern over greenhouse gas emissions.

Traditional diversification across asset classes is now insufficient to mitigate the portfolio risks of climate change.[6] Instead, diversification must take place across sources of risk, including increased allocation to climate positive assets.[7]

Because pension plans have regard for long-term assets, they must also be aware of long-term liabilities – the two sides must be aligned. [8] Portfolio de-carbonisation, ESG, and thematic investing are more important than ever.

[1] Mercer LLC, Carbon Trust and International Finance Corporation, “Climate Change Scenarios – Implications for Strategic Asset Allocation” February 2011, 7, as quoted in Koskie Minsky LLP, Murray Gold and Adrian Scotchmer, “Climate Change and the Fiduciary Duties of Pension Fund Trustees in Canada,” Sept 2015, 24.

[2] Mercer LLC, International Finance Corporation and UK Department for International Development, “Investing in a Time of Climate Change,” April 2015, 7.

[3] Bill 38, Pension Benefits Standards Act, 4th Sess, 39th Leg, British Columbia 2012, (assented to 31 May 2012) s 2(b), as quoted in Koskie Minsky, “Climate Change and the Fiduciary Duties,” 10.

[4] Koskie Minsky, “Climate Change and the Fiduciary Duties,” 23.

[5] Ibid., 25.

[6] Mercer, “Investing in a Time of Climate Change,” 61.

[7] Mercer, “Climate Change Scenarios”, supra note 59 at 1-2, as quoted in Koskie Minsky, “Climate Change and Fiduciary Duties,” 24.

[8] Koskie Minsky, “Climate Change and the Fiduciary Duties,” 11.