Pension schemes may see the end of stewardship ‘box-ticking’ under new proposals brought forward by the Department for Work and Pensions.
As part of a consultation on plans to improve reporting regulations, published on Thursday, trustees may be compelled to calculate and disclose a portfolio alignment metric, informing scheme members of the extent to which their investments are aligned with the Paris Agreement, while also using the data to identify climate-related risks and opportunities.
The metric will disclose how investments contribute towards the limiting of the global average temperature increase. The Paris Agreement has a goal of 1.5C above pre-industrial levels.
The DWP has also produced draft guidance on stewardship, aimed at both financial and non-financial aspects that trustees are being encouraged to engage with.
For many at the moment, it’s a case of going through the motions, so the proposed guidance on stewardship reporting shows that the government is serious about raising standards for pension schemes in this area
Claire Jones, LCP
The consultation, which runs until 11:45pm on January 6 2022, contains regulations that are planned to come into effect from October 1 2022.
More robust stewardship
The consultation documents stated that, despite the rising prominence of environmental, social and governance investing within pension schemes, their statement of investment principles are not showing more action around stewardship, something the DWP accounts to the “UK’s particularly fragmented pensions system”.
In the document’s ministerial foreword, Thérèse Coffey, secretary of state for the DWP, and Guy Opperman, minister for pensions and financial inclusion, said that the government is “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.
“We understand we are asking a lot of occupational pensions schemes and wish to thank trustees for showing great leadership. We want to support trustees in their climate disclosures and hope we can count on the same constructive relationship with industry to help ensure these measures help trustees and savers.
“To get the best possible outcomes for members, we must prioritise stewardship,” the foreword said.
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,” he added.
Claire Jones, head of responsible investment at LCP, also welcomed the proposals, and said that they mark a “significant step change in expectations on pension schemes to play their part in stewardship”.
“For many at the moment, it’s a case of going through the motions, so the proposed guidance on stewardship reporting shows that the government is serious about raising standards for pension schemes in this area,” she said.
“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”.
She said: “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.”
Regulatory and data burden
Concerns around the growing burden of regulatory, governance and stewardship have previously been voiced by the industry. In September, Pensions Expert reported on concerns that the growing governance burden being imposed on schemes was not translating into value for members.
Likewise, developing the infrastructure required to handle and disseminate complex datasets may be difficult for smaller schemes.
Tom Selby, head of retirement policy at AJ Bell, welcomed the proposals but said that there are a range of obstacles to first overcome.
Green finance roadmap still missing key details
The government has published its “roadmap to sustainable investing”, laying out a number of new reporting requirements. However, some experts have warned that the plan does not go far enough to make a real difference.
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.
“Ultimately, achieving the Paris goal requires a seismic shift in the way we as a society act, with improved disclosure representing just one piece of the puzzle,” he added.
