Local Government Pension Funds failing to protect themselves from financial risk of climate – Friends of the Earth and Platform
The report assessed the performance of the 17 largest Local Government Pension Funds  in England and Scotland, plus the Northern Ireland LGPF and the largest LGPF in Wales, in addressing climate risk against a number of questions  and revealed that:
- 8 funds are taking no or almost no action to protect their members from the financial risks posed by climate change. These funds are Hampshire, Essex, Kent, Hertfordshire, Tyne and Wear, Nottinghamshire, East Riding and Rhondda Cynon Taf.
- 5 funds acknowledge climate risks, but are not acting to address them adequately. These are Lothian, Strathclyde, West Midlands, West Yorkshire and Northern Ireland.
- 2 funds are developing strategies to tackle climate change risks, but their actions are too heavily focussed on shareholder engagement without meaningful goals, deadlines or consequences.
- These are Greater Manchester and South Yorkshire.
- 4 funds are developing stronger climate change strategies –that include tilting or divesting away from fossil fuel companies as well as engagement, and/or have engagement activities with clearer goals and timelines. These are Merseyside, Lancashire, London and Avon
The majority of funds assessed explicitly state that climate change is a material financial risk. Kent LGPF was the only fund to state that climate change is not a financial risk. Despite this, over 50% of funds have not measured climate risks and the majority of funds do not have strong, explicit strategies for dealing with these risks. A small minority of funds – Merseyside, London and Avon – are reducing their risk exposure by reducing their exposure to fossil fuel companies. Other funds are applying tilts away from fossil fuel or are considering setting fossil fuel divestment targets. Many of the funds assessed claim to use shareholder engagement with companies to address climate change but most of these funds do not have clear goals or targets for this engagement. No fund was able to provide evidence for the effectiveness of their engagement at forcing fossil fuel companies to switch their core business models away from fossil fuels. A majority of funds have low carbon investments but the size of such investments vary. Deirdre Duff, divestment campaigner at Friends of the Earth said: “Although many Local Government Pension Funds recognise the financial risk posed by climate change, they are failing to take sufficient action to address it. “Less than 20% of fossil fuel reserves can be used if we are to meet the goals of the Paris Climate Agreement. It makes neither ethical nor financial sense to invest in the fossil fuel industry when such a proportion of its assets are unburnable. “Fossil fuel investments are morally indefensible and also pose a serious financial risk to investors; pension funds should not be putting pensioners’ money at risk by investing in soon-to-be devalued gas, oil and coal companies.” Sakina Sheikh of Platform London said: “Today's report demonstrates that UK local councils must take climate action seriously. With the climate crisis underway, and a financial consensus building in the UK finance sector - it is clear that addressing climate risk has become an expected practice to ensure councils are not invested in soon-to-be stranded assets. I hope today's report gives the necessary push to councils to start divesting away from fossils fuels and reinvesting into the new economy.”
Climate change presents multiple financial risks to pension funds [3, 4]. The Governor of the Bank of England, Mark Carney, has warned that investors face “potentially huge” losses as climate action renders vast reserves of oil, coal and gas “literally unburnable” [5,6,7]. Thus, there is a growing consensus that pension funds should have strong governance structures to address the financial risks posed by climate change and ensure that fiduciary duty is not breached. The report is published by Friends of the Earth (England, Wales and Northern Ireland), Friends of the Earth Scotland and Platform London and is available online.
Notes to editors:
- The report examined the 17 largest LGPFs (15 English and 2 Scottish LGPFs) as well as the Northern Ireland LGPF and the largest Welsh LGPF (Rhondda Cynon Taf). Some of the smaller LGPFs, not included in this report, have taken stronger action to protect themselves from the financial risk posed by climate change and high carbon investments. Waltham Forest, Southwark and Islington LGPFs have committed to divest from all fossil fuels while Hackney, Haringey and the Environmental Agency Pension Fund have made partial commitments to divest from fossil fuels.
- We assessed 19 Local Government Pension Funds against 5 questions:
- Does the Investment Strategy Statement say climate change is a material financial risk?
- Are these risks then assessed (eg what proportion of a company’s fossil fuel reserves are likely to be stranded), and is there a clear strategy for managing these risks?
- Is there any reduction of risk exposure via divestment out of stocks with higher transition risks, such as fossil fuel production and exploration companies, or tilts away from high carbon investments?
- What is the fund’s approach to engagement? Are there any clear goals and deadlines for engagement, and escalation strategies if goals and deadlines are not met?
- Is there any investment in the low-carbon transition?
- The Governor of the Bank of England has warned that climate change presents systemic risks and that it could have a "catastrophic impact" on the global financial system. For more details see https://bit.ly/2DpGvNu
- Climate risks faced by pension funds may be placed into two groups
- Transition risks: the risks that funds face from potential loss of value to their holdings in companies in sectors such as fossil fuel production, which will undergo major transitions as the world moves to reduce its greenhouse gas emissions in line with the Paris Climate Agreement’s net zero emissions goal.
- Physical risks: the risks to the whole fund or sectors within it from damages caused to global, regional and national economies from accelerating climate impacts (floods, storms, drought, crop-failure, mass-migration, sea-level rise, risks of tipping points being crossed).
- For more on Mark Carney’s comments see https://on.ft.com/2quFN9i.
- Fossil fuel assets are believed to be overvalued because approximately 80% of proven fossil fuel reserves cannot be used if global average temperature rise is to be limited to 2°C above the average pre-industrial temperature. In the Paris Climate Agreement world governments agreed to limit warming to “well below 2°C” and to pursue efforts to limit warming to 1.5 °C.
- A recent modelling study has indicated that the magnitude of loss from stranded fossil fuel assets may amount to a discounted global wealth loss of US$1–4 trillion. This study also showed that fossil fuel asset stranding will occur as a result of an already ongoing technological trajectory, irrespective of whether or not new climate policies are adopted. Study paper available at https://doi.org/10.1038/s41558-018-0182-1