Consideration of climate risk by pension funds : a just transition risk lens

Pension funds and other financial institutions need to address climate risk on an urgent basis to meet the Paris Agreement goals. For some time, the law was viewed as a barrier to pension funds considering climate risk as part of their disclosure obligations and duties to their members. However, this legal uncertainty has subsided, and climate risk is now considered as potential financial risk that can be legally considered. Unfortunately, the end of one legal uncertainty has bred another: while it is legal for pension funds to consider climate risk, the extent of that consideration remains uncertain. Pension funds approach climate risk with a multitude of strategies. While seemingly optimistic, these multiple strategies divert pension funds from a holistic consideration of climate risk. This in turn, distracts pension funds playing their part in meeting the Paris Agreement goals which causes a general ignorance of the urgency of climate risk. To understand the legal extent of the current approach of pension funds to climate risk globally, this thesis analyses the jurisdictions of the UK and Australia via a unique lens of just transition climate risk. In analysing these jurisdictions with a specific climate risk lens, this thesis finds that the current approach to climate risk by pension funds is inadequate and suffers from legal gaps specifically in the form of clear regulatory guidance. These gaps stem from silent and open-ended regulations and supplementary regulatory guidance that allow pension trustees in both jurisdictions to satisfy the threshold of consideration of climate risks quite easily via multiple strategies at various degrees. These multiple strategies distract the current approach of pension funds in the UK and Australia from the urgent and holistic approach needed to address climate risk. The thesis finds that, in order to meet the Paris Agreement goals, subtle aspects of climate risk such as just transition risk need to be addressed by pension funds as such risk crystalises in the long-term and the short-term while encapsulating the elusive aspects of climate risk. Uncertainty about the legality of considering climate risk has been replaced by a lack of regulatory direction in legally considering climate risk. Consequently, the thesis utilises a just transition lens across four developed indicators – incorporating a policy on climate risk, divesting from fossil fuels, incorporating member views and incorporating climate scenario analysis – to shed light on the current compartmentalised approach to climate risk by pension funds in the UK and Australia. The duties of trustees and disclosure norms are analysed using this lens. Additionally, the actual practices of pension funds are analysed by utilising publicly available disclosures. The impact of soft law on pension fund practices is also analysed by comparing Principles of Responsible Investment (PRI) signatory funds with non-PRI funds in the UK and Australia. The thesis finds that the pension fund legal regime in relation to climate risk suffers from legal gaps. To alleviate this situation and fill some of the legal gaps, the thesis proposes a reform pathway that can potentially embed a holistic and urgent approach in the pension fund industry to climate risk in the UK and Australia, which address subtle aspects of climate risk, such as just transition climate risk