Pension funds may soon face lawsuits from their beneficiaries if they fail to account for the risk of climate change, under a new initiative launched by the Asset Owners Disclosure Project (AODP).

Teaming with ClientEarth, an environmental law organisation, the AODP launched the Climate and Pensions Legal Initiative to challenge pension managers and trustees to consider the financial risks posed by a changing global climate.

Elspeth Owens, a barrister at ClimateEarth said: “Some pension funds are to be applauded for their positive approach to assessing and mitigating these risks.

“However, many funds are failing to take any steps, and the gap between the best and the worst is widening. Those funds falling behind may be in breach of their legal duties.”

Julian Poulter, chief executive of the AODP, told IPE the initiative would be led by pension beneficiaries wishing to escalate their engagement efforts with pension funds where managers had so far failed to heed member concerns and begin assessing the risk.

“This isn’t trouble-making – we aren’t trying to rake muck here,” Poulter said of the initiative’s focus on lawsuits.

“The ideal number of cases is zero, globally. What we want is for people to change their attitude and the journey of managing their risk better.”

Asked which pension funds could be at risk of legal action, Poulter declined to single out one.

“It’s fair to say the members will likely look at the laggards we report on as being the worst-performing funds, so, naturally, those funds that are managing the risk less well than others are going to be at greater risk.”

He said several large asset owners had yet to complete any scenario modelling around climate change, and that they should be looking at the risk of value destruction stemming from political intervention – such as recent action by the US and Chinese governments to cut carbon emissions.

“For those funds that say ‘we have faith in our fund managers to trade out of that risk’ well, I think we’ve seen what happens with systemic risks when that happens,” Poulter said. 

Recent attempts by pension scheme beneficiaries to influence investment strategy have seen the Universities Superannuation Scheme (USS) agree to survey members on their investment beliefs.

However, Poulter noted that the UK Law Commission consultation that proposed such member surveys focused more on ethical investment concerns, whereas he viewed climate risk as a material financial risk that should be considered by all investors.

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