The Pensions Regulator has responded to concerns that financial institutions including pension schemes are relying on inadequate climate data when making investment decisions.

What is the issue?

The concerns were raised in a recent report by Professor Steve Keen written for Carbon Tracker titled “Loading the DICE Against Pensions”. The report warns that pension schemes are “risking the retirement savings of millions of people by relying on economic research that ignores critical scientific evidence about the financial risks embedded within a warming climate”.

A small group of economists are criticised for trivialising the impact of global warming. One example of this is the suggestion that global warming of 2 to 4.3°C will have only a minimal impact on member portfolios. According to Professor Keen, these findings are “at odds with” the scientific literature. Reliance on them by pension schemes worldwide means the long-term impact of climate change on portfolios is not being fully understood or planned for.

The Pension Regulator's response

Louise Davey, TPR’s director of regulatory policy, analysis and advice, recognised the need for schemes to “address data shortcomings and modelling limitations” and to “seek improvements”.

Ms Davey accepted that the pensions industry needs to evolve faster, calling on trustees to play their part by challenging their advisers on their climate assumptions and the data that is being used.

The focus here is clearly long-term, with Ms Davey urging schemes to think 30 - 40 years into the future when assessing the impact of climate change on savers’ outcomes.

Next steps for trustees

Ms Davey has since reiterated that the onus is on trustees to challenge advisers on their climate assumptions in an industry podcast. In light of these comments, there is no doubt that trustees are expected to be cynical when presented with conclusions which suggest a minimal impact of climate change on savers’ outcomes.

We have launched a Pension Schemes ESG Tool, helping trustees and sponsoring employers understand their ESG obligations. Download it for free here.

We are well placed to advise on ESG in relation to pension schemes of all sizes. If you would like to explore this topic further, please contact Kate Granville Smith.

This passle was written by Harvey Spencer.