Pension funds in deep water as they fail to manage ESG risks

oil_spill_beach1The Deepwater Horizon oil spill in the Gulf of Mexico has highlighted the fact that many pension funds are not doing enough to manage their environmental, social and governance (ESG) risks, suggests Fair Pensions, a charity that campaigns for pension funds and fund managers to adopt responsible investment practices, in a commentary released on Friday.  

Substantial losses on the Norwegian Government Pension Fund Global’s 1.75% stake in BP, announced on Friday, have prompted concerns for UK pension funds, which typically have 1.5% of their assets in BP, equivalent to 6% of their equity investment.

Fair Pensions says the Deepwater disaster provides a stark illustration of the consequences of neglecting ESG risks. Nonetheless, research conducted by the charity has found that such neglect is pervasive among pension funds.

Pension funds typically delegate responsibility for ESG risks to fund management companies. However, many fund management companies identify low client demand and short-termism as barriers to managing such risks effectively.

“The BP Gulf oil spill is a stark example, yet despite warning signs, UK pension funds’ scrutiny of companies’ exposure to such risk remains inadequate,” says Duncan Exley, director of campaigns at Fair Pensions. “Pension fund members are paying a heavy price for this neglect.”

Complacency about ESG risks means pension funds could experience worse financial and economic shocks in the future, says Fair Pensions. The charity is therefore lobbying the UK government to introduce regulations requiring pension funds to disclose what environmental, social and corporate governance (ESG) issues are taken into account in their investment policy, how that policy is implemented, and how funds exercise their shareholder rights.

“Investors must now take action to ensure that future risks, such as those presented by climate change, are properly managed,” says Exley.

Fiona Rintoul, Editorial Director
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