Pension fund boards must take climate change into account, or risk legal action

Just Share and ClientEarth have published a new legal opinion by a leading South African pension lawyer, which finds that the boards of South African pension and provident funds must fully consider climate risk when making investment decisions. Failure to do so exposes trustees to the threat of legal liability for losses incurred by the fund as a result.

The legal opinion specifies that this is true for funds regulated by South Africa’s Pension Funds Act, and for those funds – like the Government Employees Pension Fund (GEPF) – that are not.

Pension funds are now being asked to show that their management is adequately addressing the risks to investments posed by climate change – as they are legally obliged to do.

The aggregate value of retirement funds in South Africa is R4,2 trillion, according to the latest data. These funds are held by approximately 1600 active retirement funds on behalf of around 16,6 million members.

Tracey Davies, executive director of shareholder activism and responsible investment organisation Just Share NPC, which commissioned the legal opinion together with international environmental law organisation ClientEarth, says: “Failure to consider material financial risks arising from climate change constitutes a breach of fiduciary duty by pension fund boards, and therefore holds the potential for legal challenge. These risks include risks related to the transition to a low-carbon economy, and the risks related to the physical impacts of climate change.”

Davies says: “Just Share and ClientEarth have written to all major South African pension fund boards to set out the key legal findings of the opinion, and to provide guidance on urgent action that they must take to comply with their fiduciary duties. We hope that these boards will be willing to engage with us to drive change, so that pension fund beneficiaries are not left at the mercy of climate risk.”

Entitled Pension Funds and Climate Risk: Responsible Investing for Climate Resilience, the opinion was written by Rosemary Hunter of law firm Fasken.

ClientEarth climate lawyer Danielle Lawson says: “Pension funds are entrusted to preserve and increase the value of lifetime savings, giving people security in retirement. Members of the boards of pensions funds are legally bound to educate themselves on any material risks those savings may be exposed to, so that they can make informed investment decisions. Assessing and managing climate change risks fall squarely within that remit. Pension funds should be paying particular attention to risks associated with the coal, oil and gas industries, and the corresponding opportunities opening up in the low-carbon economy.”

In addition to ensuring compliance with their legal duties to invest for the long-term, pension funds should be taking into consideration the devastating impacts of climate change on beneficiaries’ future quality of life. For Africa, global warming could translate into an increase in temperature of as much as 6°C, with sub-Saharan Africa most vulnerable to drought and climate change-induced impacts. This scenario is already playing out in the vast area of Mozambique that has been decimated by Cyclone Idai, the worst tropical cyclone on record to hit the Southern Hemisphere. In South Africa, the impacts of such a changed climate will include increased natural disasters that will cause damage to infrastructure and have diverse socio-economic impacts, with significant effects on agriculture and rural livelihoods. Existing levels of poverty, inequality and unemployment leave SA even more vulnerable to the social disruptions that unmanaged climate change will generate.

Climate-aware investing does not involve sacrificing returns. For example, research released in February 2019 by BlackRock, the world’s largest asset manager, shows that sustainable indices have the same risk and return characteristics as traditional benchmarks. The research also found that the global companies that have reduced their carbon footprints the most every year have outperformed the carbon laggards.

Just Share and ClientEarth have recommended that pension fund boards urgently take the following actions to comply with their legal duties to consider climate risk in investment decisions:

  • Ensure that they are “climate competent”, i.e. take appropriate advice, analyse and fully understand the climate risks and opportunities in relation to their funds;
  • Assess the carbon footprint of their fund’s portfolio, and identify investments which are vulnerable to climate risk, and those which can contribute to a just transition to a low-carbon economy;
  • Develop a clear climate policy which explains the fund’s understanding of climate risk, and how the board identifies and manages it;
  • Communicate this policy to asset managers and consultants who manage the fund’s investments on its behalf, and make sure that they are appropriately mandated and incentivised to implement the policy;
  • Pursue active stewardship and engagement with companies in high-carbon sectors, including by setting clear voting policies and engagement escalation timelines; and regularly disclose to members how they are managing climate risk;
  • Develop an investment strategy with clear, measurable targets to remove portfolio carbon risk and leverage low carbon opportunities.

The legal opinion was commissioned to support the boards of South African pension funds in the exercise of their fiduciary duties, and to assist them in carrying out their functions in a way that contributes to the future resilience and prosperity of South Africa.

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