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Fund managers should treat climate change as 'significant risk'

18 March 2016

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Climate change will have far reaching implications for companies and assets that pensions funds invest in, according to chief investment officer at The Pensions Trust, David Adkins.

Speaking at the Pensions and Lifetime Savings Awards (PLSA) conference in Edinburgh recently, Adkins said the agreement reached at last year's Climate Change convention in Paris would have a significant impact.

He said pension fund managers should focus on three key areas in response to the climate change movement; treat climate change risk the same as any other significant risk, focus on financial arguments and not emotional ones, and test the financial basis behind any portfolio proposal.

"Climate change risk is not going to go away soon – 195 leaders did not turn up in Paris on a whim and they turned up to debate their individual and collective responses to the risk," he said.

Adkins advised fund managers to work out their scheme's response to climate change risk.

"What matters is that the collective belief around climate change risk is going to influence inter-government policy and the development of alternative energy sources for decades to come."

Adkins compared the process to liability risk management, saying that fund managers have no influence on interest rates but they can control their response to it – and the same is true for climate change.

He emphasised the importance of focusing on financial arguments rather than emotional ones, citing Bank of England governor Mark Carney who said that climate change risk was already having an impact on the insurance industry.

"Climate change continues to be regarded by many in the investment industry as an ethical investment or SRI issue and therefore gets prioritised as one – I think that's a financial mistake," said Adkins.

Closing his speech, Adkins asked fund managers to think about climate change in terms of risk, by testing the financial basis behind any portfolio proposal by asking yourself whether it's going to make money or avoid losing money?

"It is likely climate change risk will impact some sectors more than others and understanding the dynamics behind climate change risk is something more likely to be handled better by an active fund manager," he said.

First published 18.03.2016

Lindsay.Sharman@wilmingtonplc.com