Despite signs that the economy is beginning to recover from the biggest financial collapse in living memory, the investment outlook remains challenging.

In this environment, as the difficulties of maintaining short-term returns dominate discussions about investment strategy, climate change may seem to many a less than pressing issue. Yet it represents a significant financial risk with enormous implications for the retirement outcomes of today's savers. While understandably preoccupied with the fallout from the 2008 crisis, pension funds should not neglect to protect their members from what could be the next crisis in the making.

Climate change will have significant implications for pension funds under a range of different scenarios. If effective regulation to tackle climate change is introduced, fossil fuel companies and other high carbon assets could suffer a substantial loss in value. Around 17% of the FTSE 100's market capitalisation is attributable to just four oil and gas producers.

Conversely, if climate change is allowed to advance unchecked, the risks are even greater: extreme weather events and growing volatility of food and fuel prices are likely to hit returns across entire portfolios in ways that are both dramatic and unpredictable. The Stern Review estimates that the total cost of climate change in the 'business as usual' scenario is likely to lie in the upper range of a 5-20% loss in global GDP.

These risks are particularly significant for pension funds because they tend to be 'universal owners', meaning they have holdings across the economy and an interest in its overall health. They also have inherently long-term horizons: many of the savers currently being auto-enrolled will be retiring decades from now, and therefore need their funds to focus on issues that will impact investment returns in the long term.

However, the transition, at whatever pace it happens, to a lower carbon global economy will create significant growth in certain industries. The OECD calculates that the cumulative investment in green infrastructure required for decarbonising the global economy is $36-$42tn between 2012 and 2030.

Today ShareAction publishes The Green Light Report: resilient portfolios in an uncertain world, setting out both the case for pension funds to give attention to climate change, and the practical steps they can take to manage the risks it presents and to take up the investment opportunities arising from it.

The report profiles excellent work taking place at a range of individual pension funds. Examples include the Environment Agency Pension Fund, which already has 12-13% of its portfolio allocated to the green economy; BT Pension Scheme, which has £100m invested in a green version of the FTSE All-Share Index (with carbon intensive companies underweighted), and the Universities Superannuation Scheme (USS), which has established processes for its property holdings to reduce energy use and carbon emissions.

But it also highlights the low priority given by the sector overall to the issue of climate change. The report presents a range of complementary recommendations for pension schemes to manage climate risks and make the most of low carbon investment.

Recommendations for pension funds

• Take action to understand climate risk: consider the issues presented by climate change, educate their trustees and undertake a fund specific evaluation of risks relevant to them. During 2014 ShareAction will run a series of trustee training events with the Principles for Responsible Investment (PRI) and other organisations in the investment community.

• Develop a climate policy: translate their understanding into a concrete policy setting out the way in which they address the identified risks.

• Develop an action plan with clear goals: funds need to be able to measure the way in which their risk assessments and policies translate into action, for example by setting targets to reduce portfolio carbon risk, by reducing exposure to high-carbon, high-risk activities and by investing in low carbon opportunities.

• Address climate risk management with their service providers: ensure that their asset managers (across asset classes) and consultants are instructed and incentivised to help funds meet their goals.

• Report regularly to members on how the fund is managing climate risk.

• Engage with policy makers: funds should make their views known to policy makers, for example by co-ordinating with existing groups such as the Institutional Investors Group on Climate Change. They should also discourage companies in which they invest from taking lobbying positions contrary to pension funds' best interests.

The report is the first stage in ShareAction's three year Green Light campaign. Backed by, amongst others, the UK's two largest unions, Unite and Unison and some of its largest NGOs including Oxfam, Christian Aid, Friends of the Earth, WWF and Greenpeace, it aims to transform pension funds into climate conscious investors. These organisations will reach out to their supporters across the UK to encourage an unprecedented level of pension saver interaction with pension providers on climate change. An online action allows savers to question their pension providers on shifting capital to low carbon assets.

The response of the pensions sector to climate change will be the test of its fitness for purpose in the 21st century. Green Light aims to provide tools and opportunities for those willing to unblock the barriers to ensuring they remain so.

Louise Rouse is director of engagement at ShareAction

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