MPs have urged the government to seize upon the opportunities COP26 presents to the pensions industry and have called for more consensus on tackling climate change.
In a report published on Thursday, the Work and Pensions Committee called on the government to show global leadership on pensions and climate change ahead of the UN conference in Glasgow this November.
The committee also made recommendations on reporting standards, pension scheme governance and investment and stewardship.
Labour MP Stephen Timms, chair of the WPC, said: “The challenges of climate change can be met only by countries coming together. With pension investments unrestrained by borders, international agreement is going to be key if the potential for pension schemes to contribute to cutting carbon emissions is to be realised.
Hosting COP26 provides the UK with a unique opportunity to build an international consensus on reporting standards and stewardship and the government must seize it with both hands
Stephen Timms, Work and Pensions Committee
“Hosting COP26 provides the UK with a unique opportunity to build an international consensus on reporting standards and stewardship and the government must seize it with both hands.”
“While taking a lead on pushing for the global harmonisation of climate-related reporting requirements, the UK must not let up in implementing high standards of reporting and disclosures domestically,” he added.
Reporting standards need to be aligned
As part of the report, the committee outlined how the government should use COP26 to try to secure international commitments to work towards the global harmonisation of climate-related reporting standards.
It stated that 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.
These governance and disclosure requirements are in line with the recommendations of the Task Force on Climate-related Financial Disclosures.
Schemes with more than £5bn of assets will have to comply with the new rules from October, publishing TFCD disclosure reports and including a link to these in their annual report and accounts.
Additionally, the UK’s upcoming green taxonomy should be created to align with international standards as far as possible, the report says.
The committee has also called on the Pensions Regulator to produce an annual report into the progress made in consolidating schemes, as larger pension schemes are “usually better placed to meet the costs of making green investments”.
TPR should also produce guidance to assist schemes in setting net-zero targets.
‘Green asset bubble’ risk raises concerns
The report also raised concerns around the limited number of “suitable green assets” available for pension schemes to invest in, resulting in a risk of a "green asset bubble". To overcome this, the government should continue to support the development of products, such as green gilts, to mitigate the risk, the report recommended.
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 report added.
It also recommended that divestment should only ever be a last resort where “assets are unable to reduce their contribution to climate change”. Encouraging behaviour change in companies through good stewardship is more likely to be an effective approach to help the real economy transition to net zero, the committee suggested.
Meanwhile, the report called on the Department for Work and Pensions to set out what specific steps it is taking to ensure its policies do not incentivise divestment over good stewardship — while making clear that schemes could nevertheless consider divestment when there is no other option.
Timms added: “Pension schemes can play a major role in helping the real economy transition to net zero, but encouraging companies to become more sustainable through good and effective stewardship should always be the first step, before moves to sell off assets that are unable to reduce their contribution to climate change.
“The government needs to ensure that its policies do not incentivise divestment over good stewardship of schemes.”
Tony Burdon, chief executive at Make My Money Matter, welcomed the recommendations and said he was pleased to see that the “pensions and the role of wider finance are on the agenda for the government at COP26”.
Taskforce lays out measures to boost schemes’ voting powers
The Taskforce on Pension Scheme Voting Implementation has called on the Department for Work and Pensions and the Financial Conduct Authority to create templates and requirements aimed at boosting asset owners’ ability to vote, especially in pooled funds.
He also echoed the the committee’s “calls to build a consensus on the role of schemes in tackling climate change and meet UK emissions reduction targets”.
He said: “But with the majority of pension schemes still failing to make robust net-zero commitments, time is running out, and we must act with greater urgency if we are to use our pension power to truly tackle the climate crisis.
“That’s why we’re calling on the government to mandate for all schemes to align to net zero at COP26 this year. That way, we can ensure our pensions take advantage of the green industrial revolution, while protecting savers from the ravages of global warming.”
