Pension scheme investments and climate change

Occupational pension schemes in the UK hold almost £2 trillion in assets. The Government says that this makes them “the largest single group of institutional investors in the UK, with significant influence over the flow of investments in the economy.” Coupled with their long-term investment horizons, this means they are both particularly susceptible to the impacts of climate change and “uniquely placed to invest in the financial opportunities that are emerging, and will continue to emerge, to drive us towards a lower carbon economy.”

In recent years, the Government has introduced significant new requirements on pension scheme trustees to improve their governance with respect to the effects of climate change and show how they have taken the risks and opportunities associated with it into account in their investments.  These changes followed a report of the Law Commission in 2014 which clarified that trustees should take into account factors which are financially material to the performance of an investment and recommended changes to regulations to reflect this.

The Government went on to make changes to the regulations governing occupational pension scheme investments. The effect was to require trustees of pension schemes with more than 100 members, from 1 October 2019, to specify in their Statement of Investment Principles (SIP) their policies in relation to financial material considerations, including those relating to climate change. From 1 October 2020, they were required to produce an implementation statement explaining how they have followed and acted upon the policies set out in their statement.

In November 2021, the UK and Italy will host the international UN climate change conference (COP26) in Glasgow. Key aims of this conference include agreeing a way to take forward the 2016 Paris Agreement on climate change, and all countries committing to reaching net zero emissions as soon as possible. One of its goals is to mobilise finance.

In advance of the conference, the Government introduced what it described as “world leading regulations.” The Climate Change Governance and Reporting Regulations 2021 require larger occupational pension schemes and authorised master trusts to set climate-related targets from October 2021. Trustees will be required to undertake governance activities relating to each of the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and report annually on it. The Government says this will make the UK the first economy to mandate TCFD reporting for its pensions sector.

In a report on Pension Stewardship and COP26, published on 30 September 2021, the Work and Pensions Select Committee called on the UK Government to use November’s Glasgow conference to secure international commitments on global harmonisation of climate-related financial disclosures. Recommendations included:

• The UK should play an active role in encouraging and facilitating other economies to require pension scheme trustees to fully consider and disclose their climate-related financial risks and opportunities, as set out in the Pension Schemes Act 2021.
• The Pensions Regulator should report annually on the progress made in consolidating schemes, given evidence that larger pension schemes are usually better placed to meet the costs of making green investments.
• The Government should continue to support the development of products, such as green gilts, to mitigate the risk of a “green asset bubble” in the short-term.
• The Government should set out a UK climate roadmap to provide greater certainty for pension schemes and other investors, particularly for those investing in long-term investments such as infrastructure.
• The DWP should set out what specific steps it is taking to ensure that its policies do not incentivise divestment over good stewardship—while making clear that schemes could nevertheless consider divestment when there is no other option.

A separate Commons Library Briefing paper looks at the rules applying to Local Government Pension Scheme investments, CBP 7309, October 2021.