ClientEarth has written to the UK’s 12 largest pension funds in the UK to say that - despite some meaningful shareholder engagement - funds have yet to focus on their bond investments, which are a much bigger yet lesser-known source of fossil fuel financing.
Bonds are fixed-term loans investors provide to either governments or companies and they underpin the financing of fossil fuels. 50 percent of fossil fuel financing comes from corporate bonds, according to the Toxic Bonds Initiative, and bonds account for the largest source of financing for coal in China and India.
Existing legal duties require pension schemes to protect their beneficiaries from financial risk, with climate change posing an existential threat to the sector.
By failing to use these levers funds are exposing themselves to legal risk, lawyers said.
Lawyers highlighted that many pension schemes have committed to transition to a net zero portfolio and claim that climate change underpins their investment strategies. However, a significant amount of pensions money remains invested in fossil fuels.
According to Make My Money Matter, UK pension funds wield a staggering £3 trillion in investment power. Of that, more than £88 billion is bolstering the fossil fuel industry with almost a quarter done through bond investments. [3]
These schemes are bound by existing legal duties – known as fiduciary duties – to protect their beneficiaries. Schemes are increasingly being required to demonstrate to regulators that they have properly considered the risk climate change poses to their portfolios.