'World first': Government moves to force pension funds to disclose climate risk

The proposed changes to the Bill came as Work and Pensions Secretary Thérèse Coffey and outgoing Bank of England governor Mark Carney met last week to discuss measures aimed at "pushing pension schemes to do more on climate change".

According to a statement from the DWP, Coffey and Carney's discussion centred on furthering the work of the Taskforce on Climate-Related Financial Disclosures (TCFD), which was set up in 2015 by the Financial Stability Board - of which Carney is chairman.

Coffey said that pension schemes "shouldn't be dragging their heels when it comes to their climate change strategy".

"We've already introduced regulations that require pension trustees to set out their policy on climate change, but now we're taking things a step further," she said. "I want the UK to continue leading the way on the climate emergency defining the 21st century."

Since October 2019 schemes have been required to report financially material ESG - environmental, social and governance - considerations in statements of investment principles, and from October this year they will be required to publish a related implementation report.

The move to make climate risk reporting in the pensions sector mandatory was broadly welcomed by green groups for its potential to accelerate climate action and green investment. ShareAction's head of UK policy Fergus Moffat said financial institutions "must take responsibility for their impact on the planet and the money they manage on our behalf".

"Warm words will no longer be enough - the level of disclosure required under these laws will make it plain to see which pension schemes are really walking the talk on tackling the climate crisis and the risks it poses to our savings," he said. "As the UK hosts COP26 this year, all eyes will be on the current government to ensure this ambition reaches all areas of finance."

But parts of the pensions industry appeared less enthusiastic about the reforms. PLSA head of defined benefit, local government pension schemes and standards. Joe Dabrowski. said the amendments "appear to go significantly beyond current requirement for schemes to disclose what they are doing on scheme investment around climate change, and would give unprecedented new powers to government bodies to interfere and request changes to private sector schemes' investment strategies".

"If that's the case it would set a dangerous precedent and be wholly inappropriate," he added. "Nothing should cut across schemes' fiduciary duty and freedom to invest in members' best interests - and this will vary scheme by scheme. We urge the government to redraft the amendments and clarify its intent and respect for this principle."

However, Pinsent Masons head of pensions and long term savings Carolyn Saunders described the proposed changes as "a potential game changer for trustees".

She added: "The resulting obligations on trustees could extend far beyond the disclosure that is the main focus of the current statutory regime to require trustees to place climate change risk and opportunity at the heart of their investment strategies. And the need to publish information relating to the effects of climate change on a scheme will increase reputational risk for trustees and scheme sponsors."

The amendments tabled so far for the pension schemes bill can be viewed here.

The bill will go before a House of Lords committee from 24 February.

This article was originally published on BusinessGreen sister site Professional Pensions