Shell may be green when it comes to pension fund ESG requirements

A Shell pensioner with a marked interest in sustainability wants some answers from Shell on its climate change policies, or he’s threatening to bring his pension fund to the U.K. Pensions Ombudsman for Shell’s inadequate administration. Christoph Harwood, who was employed at Shell in the 1980s and 1990s, claims he’ll be entitled to a pension from the Shell Contributory Pension Fund (SCPF) when he retires and has been writing to the fund for two years, only to receive what he calls: “unsatisfactory answers to his requests for proof the fund is acting on the threat that climate change poses to its investments and potentially to members’ pensions.” That response came by way of a press release from ClientEarth, the environmental activist law group that is supporting Harwood in his efforts.

Harwood said: “Pension fund managers need to be changing their investment strategies as we move to a warmer and lower carbon world. Whilst the SCPF has acknowledged that climate change is one of the biggest risks it faces, it is unwilling to share with its members how it is managing this risk. All I am asking is for them to give us comfort that they are taking this seriously.”

Understanding how ESG related matters, including climate change risk, are managed by listed companies is relevant to an investor’s understanding of the prospects of a particular company. It is, therefore relevant, to a fully informed understanding of the valuation of securities they are investing in. We are increasingly aware of a challenge that institutional investors are facing in discharging their fiduciary duties given the increasing demand by beneficiaries for investments to be sustainable.
FCA response to EAC



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Harwood’s request is not out of line. In fact, says Joanne Etherton, pensions lawyer at ClientEarth, “Every pension fund member has a right to know about material risks to their scheme. The documents Mr. Harwood is asking for ought to show him how the fund is dealing with climate risk.” Unfortunately for Harwood, before taking a complaint to the Pensions Ombudsman, a beneficiary must exhaust a fund’s internal dispute resolution procedure.

Significantly, the Shell fund faces two risks, as it both holds fossil fuel investments and is sponsored by an oil and gas company. “The Ombudsman is likely to take a complaint like this one seriously,” said Etherton. “So it is in the pension fund’s interests to disclose the relevant documents now and prove that it is adequately addressing climate risk.” According to the press release, a determination from the Pensions Ombudsman is, subject to appeal, “final and binding on the parties. It is enforceable as if it were a judgment or order of the Court.” More importantly, if the case prevails with the ombudsman, the determination is likely to affect the disclosure requirements of pension funds more widely.

We hoped that the publication of guidance on [considering environmental considerations where financially material] by The Pensions Regulator would address trustee confusion about their duties. However, recent research has suggested that a lack of attention and outright misunderstanding remain widespread among Trustees.
Department of Work and Pensions

Both the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have stated that climate risk is a material factor that must be considered by trustees in their investment strategies. In response to recommendations from the U.K. government’s Environmental Audit Committee (EAC), the FCA said that it intended to consult on rule changes in the first quarter of 2019 requiring pension fund Independent Governance Committees (IGCs) and trustees of workplace personal pension plans to report on their firm’s policies regarding: evaluating environmental, social, and governance (ESG) considerations, including climate change; taking account of members’ ethical and other concerns; and stewardship.

The EAC wrote to the 25 largest U.K. pension funds in February as part of its green finance inquiry to ask how they were considering the impacts of climate risk. While some funds earned the label “more engaged” by demonstrating that they were considering climate risk in their investments, the majority of the 25 funds failed to demonstrate any such engagement.

Pension fund sustainability stats

Research conducted by consultancy firm Sustineri for one of the reports, based on the publicly available information produced by asset owners representing around 10 percent of global assets under management, shows that:
Two thirds (67%) of asset owners covered by the report have divestment policies in place relating to either high-emitting companies or companies that have not been responsive to engagement efforts
Private pension schemes tend to lag behind public pension schemes and sovereign wealth funds
Asset owners are starting to focus on long-term risks from climate change but may still be neglecting to consider the short and medium-term risks arising from climate change
Greater focus is needed on assessing climate risk for asset classes other than equities – only 3% of asset owners surveyed are looking across their whole portfolio with half of asset owners limiting carbon footprinting to public equities
The majority (83%) of asset owners publish metrics relating to engagement with investee companies
Source: Sustineri

And the Shell case is also part of a wider campaign by ClientEarth to force pension funds to manage their investments, taking into account climate risk and properly disclosing those strategies. ClientEarth has written to the trustees of 14 pension funds that were highlighted by the EAC’s own letter writing campaign warning that the funds could be at risk of litigation if they do not improve their understanding and disclosure of climate-related investment risks in line with current market practices. To back up these market practises, ClientEarth has published two reports from consultants demonstrating the evidence that climate risks are material.

According to the press release, the ClientEarth letters ask trustees to “make a public statement to members making clear what steps they are taking on climate risk—and puts them on notice that legal action by scheme members could follow if they fail to take these risks seriously.” TPR said that there are legal obligations, not just fiduciary duties, for pension plan trustees to take into account ESG factors or ethical issues if they are financially material.

“We are now putting these schemes on notice of the available evidence,” said Etherton, “and setting out the standard that they should be looking to meet as they develop their climate policies, as well as the risk for failing to do so.”

Currently, therefore, not only pension funds but other investors are covered by a complex network of comply-or-explain codes of best practice and guidance that are not well understood, while the actual legal and regulatory framework is even less well understood. Taking the case to the Pensions Ombudsman would likely help solidify the voluntary and obligatory requirements and undoubtedly improve compliance.

In response to an enquiry from CW, ClientEarth lawyers said: “The Pensions Ombudsman considers disputes relating to the disclosure of information, and we will be relying on case law relating to disclosure of documents by trustees.” They also noted that Harwood had not received a response to his latest letter threatening legal action from the SCPF “beyond acknowledgement of the letter.”