Some 35 pension schemes with assets totalling £84bn (€99.6bn) have backed LCP’s call urging regulators and policymakers to address the systemic financial risks from climate change through its five policy asks.
LCP believes systemic stewardship is a “crucial path” to achieving the scale of changes needed to combat climate change.
Systemic stewardship involves actions such as engaging with policymakers and regulators to change the rules, practices and incentives of financial markets as a whole.
To drive forward “the best possible climate outcomes” LCP has come up with five policy asks.
Firstly it said that climate regulations for investors should aim for real-world impact, not just disclosures and it should be easier for defined benefit (DB) and defined contribution (DC) pension schemes to invest in climate solutions, including growth and/or illiquid assets.
LCP believes that regulatory changes could help pension schemes overcome barriers to investing in these assets, therefore increasing the funding available from pension schemes for climate solutions.
Another ask from LCP is for climate action to match the scale of the risk, removing the current disconnect between the levels of policy ambition and implementation.
It also added that governments should set clear, credible, consistent net zero plans that are nature-friendly and socially-just so investors can invest in the net zero transition with confidence. It said that this should include details on the policies to enable each sector of the economy to transition. It said it is “essential” that climate policies are positive for nature and people to avoid unintended consequences and societal backlash.
Lastly, it said that pension trustees’ fiduciary duty should be reinterpreted to have a longer time horizon and include macro (impact) as well as micro (risk) considerations.
This is because trustees often feel hesitant to take greater account of climate change in their investment decisions because they are unclear on how this aligns with their fiduciary duty, LCP pointed out.
“Climate change cannot be tackled by investors or companies acting in isolation”
Claire Jones, head of responsible investment at LCP
It said that current regulations and guidance encourage trustees to take into account climate risks in their scheme (a micro or outside-in perspective).
“We believe trustees should also be encouraged to address the real-world impacts of their investments (an inside-out perspective) and, therefore, their contribution to the risks,” it added.
Claire Jones, head of responsible investment at LCP, said: “Climate change cannot be tackled by investors or companies acting in isolation; it demands extensive collective efforts. It requires the alignment of pension schemes, policymakers, businesses, and investors in concerted action.”
She said that policy change is essential for tackling climate change and LCP is reassured by the new government’s recognition that the “climate and nature crisis is the greatest long-term global challenge that we face” and its mission to “make Britain a clean energy superpower”.
“It’s great that many of our pension clients are already supporting our policy asks – we are keen to take their collective voice, to work with policymakers and regulators to deliver the changes that are needed to reduce systemic climate risk to the financial system and the pension scheme members that our clients serve,” she said.
Laasya Shekaran, senior investment consultant at LCP, added that these policy asks are “critical”. “Climate change poses a significant financial risk that demands immediate action. Today’s decisions will shape our future in 2030, 2050 and beyond, affecting everyone, including pension holders.”
She added that to combat the “devastating effects of climate change” global efforts need to be aligned to limit warming to 1.5°C above pre-industrial levels, pointing out that current policies worldwide fall short of this goal, risking increased natural disasters, habitat loss, and social upheaval.
“Continued inaction could lead to severe financial repercussions, potentially destabilising economies and global financial systems,” she warned.
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