Pension schemes will be required to disclose how ‘green’ their investments are under new government proposals.
A consultation on improving reporting regulations, published yesterday (October 21) by the Department for Work and Pensions, included proposals to force trustees to calculate and disclose the extent to which their investments are aligned with the Paris Agreement goal of limiting global temperature rises to 1.5 degree Celsius above pre-industrial levels.
The goal is to drive more sustainable investments and pressure energy intensive firms to ‘decarbonise’.
The DWP has also produced draft guidance on stewardship, aimed at both financial and non-financial aspects that trustees are being encouraged to engage with.
If agreed, the regulations will into effect in October 2022.
More robust stewardship
The DWP stated that despite the rising prominence of environmental, social and governance investing within pension schemes, their statement of investment principles were not showing more action around stewardship, something the DWP accounts to the “UK’s particularly fragmented pensions system”.
In the document’s foreword, Thérèse Coffey, secretary of state for work and pensions, and Guy Opperman, minister for pensions and financial inclusion, said the government was “bringing forward proposals and draft amending regulations to require relevant trustees to measure - as far as they are able - and report on their investment portfolios’ Paris alignment”.
They added: “Together with existing climate governance and disclosure requirements, this will help inform trustees’ investment decisions, stewardship and voting.
"Our proposals reflect industry calls for methodological flexibility and trustees will be supported with updates to statutory guidance."
The Pensions Regulator has welcomed the proposals.
David Fairs, executive director of regulatory policy, analysis and advice, said: “Some schemes already recognise the risk to pension pots from climate change and the potential opportunities from the transition to net zero that will be needed to meet the Paris Agreement’s goals and have voluntarily adopted net-zero targets.
“These recommendations will require more schemes to recognise those risks and opportunities and enable them to clearly communicate their progress on addressing them to savers.”
Claire Jones, head of responsible investment at LCP, also welcomed the proposals, and said they marked a “significant step-change in expectations on pension schemes to play their part in stewardship.
“If DWP gets its way, statements of investment principles, which almost all trustees have to prepare and which detail the basis on which they invest their scheme’s assets, will no longer be one-size-fits-all statements.
“They will instead be tailored documents that reflect scheme-specific priorities. This is good news as it puts the focus on how important stewardship is and how it plays a vital role in safeguarding pensions for the future.”
Jones noted that requiring trustees to measure and report on the alignment of their schemes’ assets with the Paris Agreement “will provide a more rounded picture than just focusing on emissions alone”.
“It will really help trustees understand and manage their scheme's exposure to climate-related risks and opportunities.
“However, data will be a big issue. Asset managers and others will need to get better at collecting and measuring the data, particularly in relation to private market assets.”
Tom Selby, head of retirement policy at AJ Bell, also welcomed the proposals but said there were a range of obstacles to overcome.
He said: “Devising reliable metrics on the environmental impact of stocks and funds is not an exact science, while trustees of pension schemes will continue to prioritise maximising long-term investment returns for members. Many would argue these aims can – and indeed should - go hand-in-hand.
“What’s more, just because climate reporting metrics are mandated, it doesn’t necessarily guarantee either a shift in investment focus or the broader member engagement needed to really push through meaningful behavioural change.”
Tom Higgins is a freelance reporter at FTAdviser's sister publication Pensions Expert
