ClientEarth has written to the UK’s 12 largest pension schemes warning that they could be leaving themselves open to legal risk due to the financing of fossil fuel expansion in bond investments.

Environmental lawyers warned that many of the largest pension providers were “failing to use a critical financial lever” in their engagement with fossil fuel companies and were opening the door to legal risk.

Despite ‘meaningful’ shareholder engagement, ClientEarth stated that schemes were yet to focus on their bond investments, which were a “much bigger yet lesser-known” source of fossil fuel financing.

According to the Toxic Bonds Initiative, 50 per cent of fossil fuel financing comes from corporate bonds and bonds account for the largest source of financing for coal in China and India.

Fiduciary duty requires pension schemes to protect members from financial risk, with climate change posing a “existential threat” to the sector, and by failing to use these levers pension scheme were exposed to legal risk, ClientEarth warned.

“Bonds are one of the main ways fossil fuel companies finance their expansion and pension funds investing in them run the risk of breaching legal duties,” commented ClientEarth lawyer, Catriona Glascott.

“These funds have an enormous opportunity before them: By attaching climate terms to bonds, they can help turn the tide of the energy transition and reduce their own legal risk.

“Pension scheme bond holdings span decades, but many include some of the riskiest investments long-term: Fossil fuels.

“Fossil fuel projects have a high chance of being rendered obsolete in coming decades as the world’s energy system transitions to renewables. Pension beneficiaries are having their funds thrown behind risky projects for potential short-term profits – a strategy that risks undermining long-term reward for customers.

“Pension schemes – which promise a secure future in principle – have the chance to make that both a planetary and material reality for beneficiaries. They can make bond financing dependent on climate commitments and ensure that credible company transition plans are a condition for investment.”

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