Trustees have warned of “a looming crisis of climate change-related mispricing” that could lead to sudden market adjustments, with defined contribution members among those bearing the brunt of a downturn.

The Trustee Sustainability Working Group has warned of mispricing risk as there is limited history of climate change to help markets determine the timing and impact that climate events will have on the value of financial assets.

Now, the US administration is wreaking further havoc not just on global trade, the group highlighted.

“Trump’s policy direction to disengage from climate change mitigation activities and remove corporate reporting requirements will reduce the transparency for investors and could lead to even greater asset mispricing going forward,” said Anne Sander, a professional trustee and member of the group.

This stance has already seen US-based global asset managers pull back from industry cooperation, she noted, creating a risk of other asset managers and countries also slowing down their efforts to improve real-world climate outcomes and reducing their reporting.

This will impact equity pricing in several ways, the group warns – through increased uncertainty from lower transparency, reduced investor confidence from inconsistent reporting requirements, market fragmentation, regulatory risk, and long-term impact.

Finally, there could be a climate risk pricing ‘big bang’, the group predicts: “When the markets finally ‘get it’ and climate risk is seen as [being as] financially detrimental as it is, we could see equity markets fall, recognising the inadequate transition plans of many companies.”

Bond markets could see a similar downturn “as the inadequate actions of governments are recognised”, the group argued, and urged trustees to consider how they can use their collective influence to improve climate reporting transparency and government policy for the benefit of their members.

Some of those worst affected by any sudden market repricing are DC savers and retirees, who could end up making poor choices as a result.

“Pension scheme trustees will need to ensure they determine how best they can prepare DC members for this potential increase in volatility in the returns they will experience,” said Sander. 

The call by the group comes after the Pensions Regulator highlighted that there is still a "long tail" of schemes where the trustees' knowledge of the scale of financial risks posed by climate change is limited, with just 17% of DC schemes dedicating time or resources to considering climate risk. TPR urged them to improve or consolidate, and warned it will use its enforcement powers where trustees fail to meet their legal duties on climate change.
 
Trustees have a fiduciary duty to consider financially material risks and opportunities, including those that relate to climate change. All schemes must consider environmental, social and governance factors in their Statement of Investment Principles and report on this annually in their Implementation Statement. Schemes with assets of £1bn or more must also produce a report in line with the Taskforce on Climate-related Financial Disclosures.

Before coming to power, the Labour party said it would roll out transition plans across banks, asset managers, pension funds, insurers and FTSE 100 companies. TPR said earlier this month that transition plans are an area of focus.