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Climate Change Implications for Pension Schemes

Climate change poses global, systemic risks that will affect every part of the economy. As key long-term investors and significant participants in the financial system, it is important that trustees and sponsors of pension schemes consider the implications of these risks for their pension arrangements and the part they can play in responding to the challenge.

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After 10,000 years of relative stability in the Earth’s climate, latest scientific research suggests that uncurbed, human activity could lead to global temperature rises of more than 4°C from pre-industrial levels.[1] Physical risks arising from this include heat waves, flooding, droughts and rising sea levels.

In order to reduce the risk of the worst of these potential outcomes, the 2015 Paris Agreement set out a global goal of limiting temperature rises to well below 2°C. Achieving this will require significant changes to the world economy and a move away from a reliance on fossil fuels that brings a range of transition risks.

In recent years, trustees of the larger pension schemes in the UK have been required to prepare climate-related disclosures (sometimes referred to as Task Force on Climate-Related Financial Disclosures (TCFD) reports), which capture ways in which the schemes are looking to address the scheme-specific climate risks. Whilst the smaller schemes are currently out of scope for producing climate-related disclosures, The Pension Regulator’s General Code that came into force in March 2024 requires trustees of schemes of all sizes to better understand the risks posed by climate change.

Understanding the implications of climate change can feel like a mammoth task as it spans so many different areas: investment, governance, covenant implications, liability impacts and member considerations, and understanding the potential implications of each is important, but we believe they are best considered in a coherent and integrated manner. Our team works with specialists from across our business to help trustees and corporates understand the issues, comply with legislative requirements and more broadly consider how schemes can go further to quantify and address the risks and opportunities arising from climate change.

Footnotes

  1. climateactiontracker.orgReturn to article

Thinking Ahead Institute

The Thinking Ahead Institute brings together the world’s major investment organizations to be at the forefront of changing the industry for the benefit of the end saver, through thought leadership research and innovation. Funded by WTW and member subscriptions, the Institute was established in January 2015 as a global not-for-profit group comprising asset owners, investment managers and service providers. As of May 2022, it has over 55 members with a combined responsibility for over US$16 trillion.

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