On 23 October 2012, the Asset Owners Disclosure Project (AODP) released a new report regarding pension and superannuation fund trustees’ fiduciary duty that indicates there are significant legal risks in the event of financial losses caused by climate change impacts, both physical and regulatory.

The AODP commissioned leading global law firm Baker & McKenzie to study the evidence for trustee obligations over climate change, looking at developments and action since the groundbreaking Freshfields reports [1].

The AODP/Baker & McKenzie report has used the Australian legislative framework as a reference point having similarities with trust law in other major pension economies.

The AODP/Baker & McKenzie report has found that trustees’ understanding of climate risks was reasonably advanced, but that action taken to manage climate risk had been very limited. It concludes that this gap between understanding and action represents a clear legal risk to trustees.

The report will be launched by ITUC General Secretary and AODP board member Sharan Burrow during her plenary speech at the Fiduciary Investors Symposium in Santa Monica, California.

She said: “A potential climate or carbon crash will dramatically impact portfolio values and frankly make the sub-prime crisis look mild. Unlike sub-prime however, trustees have had ample warning about climate change and its regulation. Members will turn to their trustees for answers and potentially legal recourse. It is clear that trustees must act immediately.”

AODP Executive Director Julian Poulter added: “This is the final piece in the jigsaw for trustees. Earlier work in this area alluded to trustee responsibility to manage risks such as climate change but we now have definitive views of trustee exposures in the event of climate change damaging asset values. The scary thing for trustees is that some underlying value destruction is already underway.”

Baker & McKenzie Global Partner for Climate Change Martijn Wilder said “Clearly there has been significant growth in the reasons for trustees to manage climate risks in the context of their fiduciary duty. In the event of climate change regulation or physical impacts that will or already have the potential to damage the value of a fund’s portfolio, it is difficult to conceive of a defence for trustees who cannot demonstrate they have considered the risks and taken steps to mitigate the risks that now exist – and in some circumstances changing what they invest in.”

The AODP wrote to the world’s largest 1,000 funds in July, seeking disclosures of climate risk strategies. Few funds have bothered to respond so far.

“We currently have a situation where most funds refuse to disclose publically or even to their own members how they manage climate risks,” said Poulter. “The world’s asset owners are part of some of the world’s leading initiatives extolling the importance of transparency and yet they are refusing to come clean about their own positions. Such resistance to transparency will surely only add to their legal exposure once the low-carbon
economy begins to impact the value of their fossil fuel based investments.”

The report can be accessed here.

[1] For some time, there has been wide and vigorous debate within the superannuation industry, both in Australia and overseas, regarding the fiduciary duty of trustees around environmental, social and governance (ESG) issues. The UNEPFI’s “Freshfields” report of 2005 (http://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf) was the first
signal to trustees that consideration of these types of issues was consistent with fiduciary duty and the goals of long-term member returns. Freshfields was re-issued in 2009 (http://www.unepfi.org/fileadmin/documents/fiduciaryII.pdf) with further clarification and a notable strengthening of this message (it stated there was an obligation to consider ESG issues in investment management processes) and several bodies have urged regulatory clarification for trustees.