Financial Markets Law Committee

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Economics - markets - law - UK.


The Financial Markets Law Committee researches and reports on issues of legal uncertainty or misunderstanding for the benefit of participants in the financial markets.

It is established as an educational charity, and headquartered in London.

Pension fund trustees must consider climate change
"The paper reviews issues of fiduciary duty and its intersection with sustainability and climate change and draws some clear conclusions in several important areas.
First, pension fund trustees' primary investment duty is balancing returns against risks. In order to do that, trustees have to consider financially relevant factors. While the industry has been somewhat divided on whether issues that are non-financial in nature (like climate change or biodiversity loss) can constitute a financial factor, the paper makes it clear that what distinguishes a financial factor is the motive underlying its consideration, not the nature of it.
Given that climate change and other sustainability-related issues can clearly impact an investment's risk and return, the report finds that it is imperative that trustees classify them as financial factors. Notably, the current legal framework requires trustees to take all financial factors into account in investment decision making.

Secondly, the paper quashes the argument that it is not for pension trustees to concern themselves with matters such as climate change, as these are taken care of by governments and regulators. It unequivocally states that such an approach would not address all the risk therefore trustees can't abdicate their responsibility here.

The paper furthermore implores trustees to give due consideration to systemic risks and not only consider risk/return combination at an asset or portfolio level, but at all three levels, including the economy. The paper crucially reminds trustees that pension schemes exist within the economy and cannot insulate themselves from systemic risks by way of diversification.

The paper additionally addresses the importance of time horizons. While certain investment decisions may hold over shorter periods, this may not be the case over longer periods. It also looks at the dynamic nature of risks and returns and stresses the importance of monitoring these changes. It makes a significant point that sometimes it might be appropriate to forego a short-term gain if such a gain would result in identifiable longer-term risks to the sustainability of returns to the fund."
Pension Fund Trustees and Fiduciary Duties: Decision making in the context of Sustainability and the subject of Climate Change - Maria Nazarova-Doyle, FMLC member - February 2024.

See also

Other resources