The Pensions Regulator will sanction pension scheme trustees who don’t follow the new environmental, social and governance rules that come into force in October, the minister for pensions and financial inclusion has warned.
In a debate yesterday (May 22) in parliament, Guy Opperman said "for too long" there has been a perception by too many trustees that the "environmental practices of the firms they invest in are purely ethical concerns, which they do not need to worry about - that is utterly wrong".
He said: "Aside from the ethical considerations, there are real financial risks resulting from climate change. With the long-term horizons of pension investing, trustees must now consider that when they set out their investment strategies.
"Trustees who do not consider those matters will be breaching their statutory and potentially their fiduciary duties not only to current but future members."
FTAdviser reported in September that pension schemes – both defined benefit and defined contribution - with more than 100 members will be forced to disclose the risks of their investments, including the ones arising from ESG considerations.
Mr Opperman noted that TPR is planning to publish further guidance on managing the climate change risk in advance of these regulations.
He revealed that a key point is that non-compliance with those regulations can potentially lead to sanctions from TPR, which "is acutely mindful of its obligations and what it needs to do to address this particular point".
Megan Clay, climate finance lawyer at not-for-profit firm ClientEarth, said Mr Opperman’s announcement is "hugely significant and shows the government feels climate risk and opportunities should be central to pension funds’ investment decisions".
She said: "Pension fund trustees must take note.
"If catastrophic climate change is allowed to continue on the current trajectory, pensions savings will suffer, as will quality of life in retirement."
Ms Clay added that the current law already requires trustees to consider the financial risks posed by climate change when making their investments.
She added: "But we hope that these conversations will lead to new legislation clarifying and strengthening this duty to push pension funds to invest in line with the Paris Agreement.
"That means they, and their savers, will support and benefit from the transition to a low carbon economy."
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