The government is consulting on plans designed to ensure pension providers consider the risk of climate change on their investments, with trustees legally required to assess and report on the financial risks
Trustees of larger occupational pension schemes and authorised schemes will have to demonstrate effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities.
Climate change is expected to have a significant impact on pension schemes’ assets and returns for savers, both through the risks of a warmer planet, and the transition to a lower carbon economy.
Under the proposals the 100 largest occupational pension schemes - those with £5bn or more in assets, and including all authorised master trusts – will be required to publish climate risk disclosures by the end of 2022.
Around 250 more schemes with £1bn in assets would then have to meet the same requirements in 2023.
Thérèse Coffey, secretary of state for work and pensions, said: ‘I am delighted to announce our proposals to make reporting on sustainable investments mandatory, one of the most significant steps to date in the UK’s progress on tackling climate change.
‘We were the first major economy to commit to reaching net zero by 2050 - to deliver this we must start now, working with investors and others to achieve this ambitious target.
‘These measures will ensure pension schemes are in an ideal position to drive change to a sustainable, low carbon economy which will benefit everyone.’
Pension schemes will be required to use the taskforce on climate-related financial disclosures (TCFD) framework to disclose climate-related risks and opportunities and to demonstrate this has been embedded into their organisation, in areas including governance, strategy, risk management, metrics and targets.
They will have to conduct scheme scenario modelling to analyse the implications of a range of temperature scenarios for a scheme’s assets, to prompt strategic thinking about climate risks and opportunities, and will need to report the greenhouse gas emissions of their portfolio.
Schemes will be required to publish their report on a website and to notify pension scheme members via their annual benefit statement that the information has been published and where they can locate it. Failure to do so will be subject to a mandatory penalty imposed by The Pensions Regulator.
The consultation will also signal an intent that schemes report on the extent to which their portfolios are aligned with the Paris Agreement, which called for the limiting of global (average) temperature rises to below 2°C (on pre-industrial levels), although making this alignment mandatory will be subject to a separate consultation exercise.
The Department for Work and Pensions Pension Schemes Bill - currently before the House of Commons - includes powers to enact the measures outlined in the current consultation.
Vassos Vassou, a professional trustee at Dalriada Trustees, said: 'The DWP proposal on climate risk disclosures demonstrates the direction of travel of the industry.
'Trustees have had to deal with lots of recent changes over ESG and climate change but this goes one step further by asking the largest schemes to report against the TCFD framework.
'The investment managers of those schemes will in turn have to be supportive of what the trustees require. This will help change the behaviour of investment managers and will also put a spotlight on the trustees who will have to show what actions they have taken on climate change.
'I would hope too that the impact of these requirements will also trickle through to smaller schemes who often use the same investment managers.'
The consultation closes on 7 October. The government’s current plan is to consult on regulations in late 2020 or early 2021.