UK Trustee Meeting reassesses Financial Markets Law Committee's report on global warming
The Financial Markets Law Committee (FMLC) has published a paper arguing that climate change is a financially material factor to consider in investment decision-making. This paper has sparked a lively discussion among UK pension trustees, who are grappling with the challenge of balancing their fiduciary duty with the need to address climate change.
Tim Giles, trustee director at IGG, emphasized the importance of considering any material ESG factor, including climate change, as a non-financial factor and ignoring it would be negligent. Simone Lavelle, cio at Pi Partnerships, agreed, stating that the FMLC guidance gives some legal comfort to trustees who take climate change and social factors into account when investing.
However, not all trustees see the FMLC guidance as a game changer. Giles believed it offered clarification rather than a radical shift. Alan Pickering, president and trustee at BESTrustees, welcomed the report as 'permissive, rather than prescriptive,' but emphasized his primary responsibility was to ensure the schemes he looked after prospered.
The problem of balancing fiduciary duty and the need to tackle climate change is still 'ill-defined' and the industry is in disagreement on the scope of the problem to be solved, according to Venetia Trayhurn, trustee director for the John Lewis Partnership Trust. Trayhurn highlighted frequent transfers as an additional challenge for DC investors, despite their investment horizon potentially being much longer.
Griffiths argued that climate-conscious investing should not be perceived as a dichotomy between lower returns and philanthropy against good returns from high-carbon investments. He expressed concern about the trend towards divestment, warning that it could lead to private asset owners treating carbon-heavy assets unsustainably. Across the group, trustees expressed caution on divestment, with Pickering warning that leaving assets in the hands of people who prioritize short-term gains could be risky.
In recent months, voices such as those of the UK Pensions Regulator and influential trustees like Helen Dean and Mark Taylor have increasingly emphasized that trustees in the UK must expand their fiduciary duties to include consideration of the financial risks posed by climate change in their decisions.
Some trustees are taking action. Aviva is considering investing in a Climate Transition Fund which includes carbon offsets, but would involve compromising on returns over the short term. Graeme Griffiths, a non-executive director and pension trustee at Aegon UK, stated that corporate DB schemes remain long-term investors despite moving towards de-risking.
Longview Networks gathered a group of seasoned trustees for UK DB and DC schemes to discuss the balance between tackling climate change and fiduciary duty in their investment decisions. Lavelle cautioned that trustees should not become overly reliant on such guidance, stressing the importance of forming strategic opinions rather than just complying with checklists.
As the debate continues, it is clear that UK pension trustees are grappling with the complex challenges of balancing their fiduciary duty with the need to address climate change. The industry will continue to evolve as trustees navigate this delicate balance and seek to make informed, responsible investment decisions.
