The Financial Conduct Authority (FCA) has published plans to make sure providers of workplace personal pension schemes take the risk of climate change into account.
Next year the regulator will launch a consultation on new guidance on climate change financial risk for providers of workplace personal pension schemes.
The FCA argued that climate change is no longer only an ethical concern, but a practical consideration for the UK pension industry.
When taking investment decisions, the FCA said pension providers increasingly recognise climate change could reduce investment values and pension outcomes.
But the regulator said adequate disclosure of climate change risk was particularly important for the investment strategies of workplace personal pension schemes, where consumers are generally defaulted into investments, rather than choosing them themselves.
Over 90 per cent of these schemes' members have their pension savings in the default strategy and rely on the investment decisions made for them.
Andrew Bailey, the FCA’s chief executive, said: "Climate change presents a disruptive and potentially irreversible threat to the planet.
"The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.
"The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fairway which meets users’ needs."
In its 22 page-long discussion paper Climate Change and Green Finance published today (15 October), the regulator said providers should consider financial factors - such as environmental, social and governance (ESG) and climate change risks and opportunities - and non-financial factors - such as responding to members’ ethical concerns - when making investment decisions.
The consultation, alongside other proposed changes for independent governance committees, will be launched in the first quarter of 2019.
By launching such guidance, the regulator is complying with the suggestion made by the Environmental Audit committee, which published in June the final findings of its green finance inquiry.
In the document, MPs urged the FCA to rectify a "worrying disparity" between the guidance it issues, when compared to The Pensions Regulator.
The Prudential Regulation Authority (PRA) also published a consultation paper on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change, which was welcomed by the FCA.
Both regulators have been working closely together to develop a joined-up approach to enhance the resilience of the UK financial system to climate change, and are setting up a Climate Financial Risk Forum.
This is designed to help the financial sector manage the financial risks from climate change and support innovation for financial products and services in green finance, the watchdog revealed.
The forum will involve representatives from industry as well as technical experts and other stakeholders. The PRA and FCA expect to finalise membership of the forum by the end of November, having a first meeting in early 2019.