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Climate change implications for pension schemes

Climate change poses global, systemic risks that will affect every part of the economy. As key long-term investors and significant participants in the financial system, it is important that trustees and sponsors of pension schemes consider the implications of these risks for their pension arrangements and the part they can play in responding to the challenge.

After 10,000 years of relative stability in the Earth’s climate, latest scientific research suggests that uncurbed, human activity could lead to global temperature rises of more than 4°C from pre-industrial levels1. Physical risks arising from this include heat waves, flooding, droughts and rising sea levels.

In order to reduce the risk of the worst of these potential outcomes, the 2015 Paris Agreement set out a global goal of limiting temperature rises to well below 2°C. Achieving this will require significant changes to the world economy and a move away from a reliance on fossil fuels that brings a range of transition risks.

Stakeholders of pension schemes have long been urged to play their part in meeting these challenges, but the Pension Schemes Act 2021 cements the requirements for UK pension scheme trustees.

From October 2021, trustees with more than £5bn in assets must have effective policies to manage climate risks (in line with the Task Force on Climate-Related Financial Disclosures (TCFD)) with disclosure requirements in 2022. These requirements then apply to schemes with more than £1bn in assets a year later, with the possibility of wider application in future years.

While primarily an investment issue, there are questions of governance, covenant implications and liability impacts, that need to be considered together in a coherent and integrated manner. Our team works with specialists from across our business to help trustees and corporates understand the issues, comply with legislative requirements and more broadly consider how schemes can go further to quantify and address the risks and opportunities arising from climate change.

Read more about how this topic is increasing in importance for pension schemes in our article: Climate change is moving up the pensions agenda.

Footnote

1. climateactiontracker.org

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