FCA leaves pension providers in the dark on climate risk

Pension providers have called on the Financial Conduct Authority (FCA) to provide clarity about their obligations in managing climate risk in contract-based pensions and for the regulator to better align itself with The Pensions Regulator, which oversees trust-based pensions.

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Legal & General and Scottish Widows have formally backed recommendations from ShareAction and ClientEarth for the FCA to improve guidance and update its rules to reflect the risk of climate change to retail investors.

Report recommendations

A report published today from the responsible investing campaign groups has recommended that the FCA should align itself with The Pensions Regulator (TPR), require independent governance committees to report on providers climate risk policies, and that the regulator should issue guidance on non-financial factors providers should consider when making investment decisions.

LGIM commented that it wanted to provide the same offering to all pension members regardless of whether the member’s pension is provided through a trust or is contract-based.

Environment misconception

But while LGIM and Scottish Widows supported the recommendations, the report, which contacted 12 pension providers representing more than 11 million workplace pension scheme members, found a misconception among pension providers that climate change and environmental factors were non-financial in nature.

Aegon, Aviva, Legal & General, Scottish Widows, Standard Life, Virgin Money and Zurich all contributed to the report, while Fidelity, Old Mutual, Royal London or Phoenix Life were contacted but did not participate.

Providers also raised concerns that there was a lack of demand for ethical products and the costs of addressing climate risk would result in reducing investors’ net returns.

However, the report countered these concerns, saying savers risk “significant losses” over the medium to long term if their investments are not properly assessed for climate risk.

It said that the FCA should require contract-based providers to address climate risk in line with the requirements of trustee-based schemes, which are regulated by TPR.

FCA ‘baffling’

ShareAction senior policy officer Rachel Haworth said: “The FCA has confirmed that climate change poses a risk to it meeting its regulatory objectives, so it is baffling that it still seems to have no plans to take action on this issue”.

“Financial regulators around the world are stepping up to the challenge of protecting financial markets and consumers from the risks associated with climate change. The FCA must not be left behind,” Haworth said.

ClientEarth pension lawyer Joanne Etherton said: “As the regulator the FCA has a duty to protect consumers and we are concerned that its failure to require providers to consider and manage climate risk and keep up with other regulators could amount to a serious underperformance in its duty to savers.

“Financial regulators around the world are stepping up to the challenge of protecting financial markets and consumers from the risks associated with climate change. The FCA must not be left behind.”

The report noted that the European Commission is looking at incorporating ESG factors into the mandate of supervisory authorities and that following Brexit UK financial services should follow suit to remain competitive.

ShareAction and ClientEarth are seeking a meeting with the regulator in the next two months to discuss the report’s findings.

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