The Royal Borough of Kensington and Chelsea (RBKC) has said that its pension fund’s continued investment in fossil fuels could pose “material financial risks to its portfolios” and fiduciary duties.
A joint report by RBKC’s Green Champions Network and Climate Change team said that the persistent investment in fossil fuels could pose a “dangerous long-term financial risk to investors”. The report stated that the world is transitioning to a low-carbon economy and non-renewable energy resources are becoming increasingly redundant.
“Continued investment in fossil fuels poses material financial risks to portfolios, and funds have fiduciary duties to consider the benefits of decarbonising as part of their investment strategies.”
It highlighted that Local Government Pension Scheme (LGPS) funds’ investment in fossil fuels could risk its fiduciary duties to younger members, to whom it will provide pensions in the future.
“Funds also have a legal obligation to treat members “fairly as between them”. This means taking seriously the longer-term interest of younger members who may well be affected more by the climate emergency,” the report added.
The report was presented to the investment committee at RBKC on 26 July. The committee manages the functions and duties of the authority’s LGPS fund.
Legal implications
In the same meeting, the investment committee discussed another report by Phil Triggs, tri-borough director of treasury and pensions, which stated that the council’s legal services considered RBKC’s Climate Emergency Action Plan to include the pension fund.
Hence, both the authority’s wider activities and the pension fund’s investments must be compatible with the council’s climate plan, which aims to achieve net-zero carbon emissions by 2030.
The report said: “The policy therefore applies to pension fund investments and is a policy to which the investment committee should have regard to in preparing its investment strategy unless there are good reasons to depart from it.”
But, the report highlighted that investment decisions to divest from fossil fuels to meet climate targets must not pose a risk to the pension fund.
“The core purpose of the LGPS is to provide pensions for its members but administering authorities may take non-financial considerations into account providing that doing so would not involve significant risk of financial detriment to the scheme and where they would have good reason to believe that scheme members would support their decision,” the report stated.
At the meeting, the investment committee formally agreed to set up a working group with the Tri-Borough Treasury and Pensions team to develop a proposal for the fund’s future investment priorities, which aligns with the council’s net-zero policy.
Continued investment in fossil fuels poses material financial risks to portfolios, and funds have fiduciary duties to consider the benefits of decarbonising as part of their investment strategies.
RBKC’s response
A RBKC spokesperson told Room151: “The council has set ambitious goals to have carbon neutral operations by 2030 and is already making significant progress, with energy efficient retrofitting in progress for our housing stock and soon to take place in school buildings.
“It is in our members’ interests that we continue to provide a solvent pension fund, particularly in uncertain times. There would need to be very careful consideration of the complexities involved before making changes to the current pension arrangements.”
The core purpose of the LGPS is to provide pensions for its members but administering authorities may take non-financial considerations into account providing that doing so would not involve significant risk of financial detriment to the scheme.
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