Climate Change Risk a Threat to Scottish Pension Funds

Two Scottish pension funds with a combined £27.1 billion ($35.1 billion) in investments are failing to address “major risks” from climate change, according to a new report from environmental group Friends of the Earth Scotland.

The report said the Lothian Pension Fund and the Strathclyde Pension Fund, which are run by the Edinburgh and Glasgow Councils, have an estimated £803 million and £153 million invested in fossil fuel companies, respectively. And although the pensions raised climate change issues with the companies they invest in, the report said the funds have not set any clear objectives.

While the pension funds claim to be addressing climate risk through shareholder engagement with fossil fuel companies, the group said their approach of asking fossil fuel producers such as BP and Shell to become more climate-friendly is often in direct contradiction to the oil companies’ business plans.

“Lothian and Strathclyde Pension Funds are not doing enough to protect pension holders from the risks associated with climate change,” Ric Lander, divestment campaigner with Friends of the Earth Scotland, said in a release. “Those running our pension funds are still banking on Big Oil, fracking, and coal to fund our pensions in the decades to come. This strategy is just not credible.”

The report examined the 17 largest local government pension funds (LGPF) in England and Scotland, as well as the Northern Ireland LGPF, and Rhondda Cynon Taf, which is the largest Welsh LGPF. The group noted that the Waltham Forest, Southwark, and Islington LGPFs have committed to divest from all fossil fuels while Hackney, Haringey, and the Environmental Agency Pension Fund have made partial commitments to divest from fossil fuels.

While the report found Scottish funds were lagging behind regarding addressing climate change risk, it also found that English funds, including Merseyside, Lancashire, London, and Avon local government pension funds “were found to be pushing ahead.” The group lauded those funds for reducing their exposure to risky companies, and setting clear goals for engaging with the companies they invest in.

Lothian Pension Fund’s “responsible investment” policy acknowledges that environmental, social, and governance (ESG) issues can affect a company’s financial performance, and that it has “a responsibility to take these issues seriously.” However, it also said that it does not disinvest from companies for “purely non-financial reasons,” and prefers to engage with companies to ensure responsible investment. 

“This is because engagement, particularly in collaboration with other asset owners, can lead to positive change in corporate behavior and strategy,” says the fund. The pension argues that divestment is “less responsible” because if all responsible investors divested their shares, there will be no owners challenging boards on their strategies.

And the Strathclyde Pension Fund says that it has incorporated ESG in its investment strategies for more than 20 years, having first developed its corporate governance strategy in 1995, and its first socially responsible investment strategy in 2000.

It also said it became a signatory to the United Nations Principles for Responsible Investment (PRI) which encompass ESG issues, in 2008, and in 2015 joined the Local Authority Pension Fund Forum, which promotes corporate social responsibility.