An amendment to climate risk provisions in the pension schemes bill could force schemes to align their investment strategies with the Paris agreement, going one step further than the government’s own provisions for reporting against sustainability criteria.
The revision moved by cross-bench peer Helene Hayman on Tuesday relies on similar wording to one confirmed by the governmentin March, when pensions minister Guy Opperman announced the intention to require stress-testing against a range of climate change scenarios.
But the government’s own wording sits within the context of ensuring “effective governance of the scheme with respect to the effects of climate change”, affording trustees the flexibility to set their own strategies, provided they consider and report on the risks posed by global warming – which may require scenario modelling for different levels of success in meeting the UN Framework Convention on Climate Change, known as the 2015 Paris agreement.
Legislation that says trustees must base investment decisions on government treaties is quite far-reaching and would represent a shift in some fairly fundamental trusts law principles
Stuart O'Brien, Sackers
The Hayman amendment, however, could see a more prescriptive approach taken if it is successful. It would require schemes to “take account of international climate change treaties to which the UK is a signatory”, which one lawyer said would break new ground by straying into prescribing trustee investment policy.
Breaking new ground
Stuart O’Brien, a partner at Sackers, led the creation of guidance for schemes on how they may approach the government’s proposal for reporting in line with the Taskforce on Climate-related Financial Disclosures. He said it “would be an awful shame if the two things got confused”.
“Legislation that says trustees must base investment decisions on government treaties is quite far-reaching and would represent a shift in some fairly fundamental trusts law principles,” Mr O’Brien said.
“It’s quite different to saying, as the government’s own amendments do, that you must build consideration of certain climate scenarios into trustee risk assessment and disclosures, but ultimately trustees make their own decisions on their investments.”
Indeed, the Department for Work and Pensions has been “at pains” to stress the primacy of trustees in investment decision-making, according to Mr O'Brien, and after a cautious welcome its reform proposals have been met with a welcome from the pensions industry.
Caroline Escott, senior policy lead on investment and stewardship at the Pensions and Lifetime Savings Association, said: “Climate change is an issue affecting every area of society today and the pensions sector is by no means immune to this. Evidence shows that the prospect of warming above 2C will have a severe impact on our society, our environment and mankind as a whole.
“The PLSA believes it is vital that pension schemes use appropriate scenarios to assess the impact climate change will have on their investments. Having consistent and comparable information to aid schemes in exercising their fiduciary duties is essential.
“We think the TCFD’s work on scenarios, governance, strategy and risk will help, but as part of our Investing for Good initiative, we are working with members and industry groups to overcome many of the other barriers that inhibit schemes in undertaking effective climate investment.”
Concrete action hampered by bad data
However, others said that while the goals of the Hayman amendment were eminently reasonable, putting them into practice would be far from simple.
Kerrin Rosenberg, chief executive of Cardano UK, said: “It’s perfectly understandable why this amendment has been tabled, because if the government is going to sign up to these treaties, how do we comply with the treaties we have committed to. Clearly, institutional investors are a large and important part of the economy.”
In practice, he expected trustees’ first compliance steps to be similar to that required by the government, updating policies to reflect new commitments and monitoring, while relying heavily on consultants and fiduciary managers for resources.
Beyond that, though, things get more complicated. “The next step is going to be skewing the portfolio, tilting it away from things, possibly tilting it towards things as well,” he said.
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Mr Rosenberg explained that while scoring on environmental, social and governance criteria is improving, different providers still yield drastically different results. In addition, the information schemes would rely on to comply with the Hayman amendment is much patchier outside of public developed markets.
“For many pension funds, the other tricky aspect of this... is whether and to what extent this goes beyond your equity portfolio,” he said.
