Last year, the demand for greener pensions soared to 21 million savers in the UK, according to campaign group Make My Money Matter. As awareness grows around the climate impacts of pension savings and their role in shaping the future savers will retire into, a spotlight has been put on pension funds and perceived legal uncertainty around action on sustainability.
Pension funds are uniquely positioned to influence the direction the world is going in and issues like climate change. As the stewards of future retirees’ savings, their point of view must take the long-term into account.
However, a gulf is emerging between what savers want and need from their pension providers, and trustees’ understanding of what they are able to do within the current legal framework.
Pension funds’ fiduciary duties require them to act in the ‘best interests’ of their beneficiaries – pension savers. Typically, this duty has been interpreted to mean maximising risk-adjusted financial returns.
A report published in February by Pensions for Purpose found that many funds are concerned about the extent to which addressing climate change falls within this duty.
There is likely even greater caution around how the social impacts of investments fit into this. Internationally recognised climate science has made it clear that there is no room for new fossil fuel extraction if we are to limit global temperature rises and mitigate more extreme impacts of climate change.
Yet, a pension fund considering a shareholder resolution calling on a portfolio company to stop new oil and gas field development may feel this conflicts with their fiduciary duty. This is despite the impacts of such a company potentially undermining a liveable future planet and society for their beneficiaries.
To the average pension saver, it is likely common-sense that their ‘best interests’ would include a stable, healthy society and planet now and in the future.
Many experts have demonstrated that legal frameworks around fiduciary duty in the UK permit and, indeed, often require investors to consider sustainability where these impacts are instrumental to achieving financial return.
However, in the law, the ultimate purpose of pension schemes remains maximising risk-adjusted financial returns.
Until it is clarified that investors may be motivated by broader factors, and they are given greater latitude to consider accepting slightly lower financial returns in the short term when deemed necessary to protect beneficiaries’ broader interests, such as their quality of life or the environment, pension funds simply do not have the certainty to take action on environmental and social impacts that we need.
In the debates around the Financial Services and Markets Bill, questions have been raised around whether fiduciary duty is fit for purpose.
A proposed amendment in the House of Commons, which would have resulted in pension schemes considering the long-term impact of their investments on people and the planet, received cross-party support, but unfortunately did not pass.
Still under consideration is an amendment, which would call for the Department for Work and Pensions to issue statutory guidance on how trustees and fund managers should regard the impact of their investments on society and the environment.
Whilst this would be a welcome step in providing more clarity on how pension funds can incorporate sustainability considerations into their investing within our regulatory framework, it ultimately falls short of amending the ‘black letter’ of the law itself.
March’s sobering Intergovernmental Panel on Climate Change report set out the slim window of opportunity for decisive action on climate change, pointing to the social and environmental devastation already wrought by extreme weather such as flooding and heatwaves.
Helping savers plan for their financial futures can and should entail considering the kind of world their pensions are building, and the price that will be paid if it doesn’t.
If the government wants to empower pension funds to act in the ‘best interests’ of savers, their children, their communities and the planet, we need legislative change to clarify fiduciary duty.
Ellie McLaughlin is the senior policy officer at ShareAction.