UK Governing Body Reviews FMLC Document on Climate Change Impacts
In a series of discussions and statements, various trustees and financial organisations have emphasised the importance of considering climate change as a financially material factor in investment decision-making.
Tim Giles, trustee director at IGG, stated that any material ESG factor is de-facto a financial factor. Neglecting to consider it in investment decisions could be considered negligent. This view was echoed by the Financial Markets Law Committee (FMLC), who published a paper arguing that climate change is a financially material factor that should be taken into account.
Griffiths, a non-executive director and pension trustee at Aegon UK, highlighted the long-term nature of corporate DB schemes, which makes them ideal for climate-conscious investing. However, he cautioned against perceiving climate-conscious investing as a dichotomy between lower returns and philanthropy against good returns from high-carbon investments.
Simone Lavelle, cio at Pi Partnerships, noted that the FMLC guidance gives some legal defence to trustees who take climate change and social factors into account when making investment decisions. She urged trustees not to become overly reliant on such guidance, emphasising the need for strategic opinions rather than just complying with checklists.
Longview Networks organised a discussion with seasoned trustees for UK DB and DC schemes about balancing climate change and fiduciary duty in investment decisions. Venetia Trayhurn, trustee director for the John Lewis Partnership Trust, mentioned frequent transfers as an additional challenge for DC investors and the industry's ongoing disagreement on the scope of the problem of balancing fiduciary duty and tackling climate change.
Alan Pickering, president and trustee at BESTrustees, broadly welcomed the report but emphasised his primary responsibility is to ensure the schemes he looks after prosper. He warned that leaving assets in the hands of people who have no perception of the risk-reward trade-off and are just in it to make a quick buck could be problematic.
Aviva is currently considering investing in a Climate Transition Fund which includes carbon offsets, but this would involve compromising on short-term returns. Anne Sander, Money Purchase Committee chair at the Aviva Staff Pension Scheme, acknowledged significant differences between investing for DB and DC schemes, particularly the challenge of balancing short-term returns and long-term climate considerations for DC schemes.
The FMLC's guidance is seen as offering clarification rather than being a game changer, according to Giles. The committee supports the view that trustees have a fiduciary duty to incorporate the financial risks of climate change into their decision-making, moving from this being permitted to now increasingly considered mandatory, with courts beginning to recognise the necessity of trustees acting in good faith on climate risks to avoid collective action problems harming beneficiaries’ interests.
Griffiths expressed concern about a trend towards divestment, warning that private asset owners might treat carbon-heavy assets in an unsustainable manner by picking them up at a discount. Divestment from listed holdings in fossil fuels, according to Griffiths, does not solve the problem.
In conclusion, the financial industry is moving towards recognising climate change as a financially material factor that should be considered in investment decisions. Trustees and financial organisations are adapting their strategies to incorporate climate risks and opportunities, balancing their fiduciary duties with the need to address climate change. However, challenges remain, particularly for DC schemes, and the industry continues to grapple with finding the right balance.
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