The government insists it is not intervening in pension scheme investment strategies with a climate change amendment to the pension schemes bill introduced earlier this month.
Trustees will have to review the impact of climate change on their investment strategy, manage exposure to these risks and determine targets for exposure to these pitfalls, under the change introduced by Baroness Stedman-Scott, a minister for the Department of Work and Pensions sitting in the House of Lords, on February 11.
In a supplementary memorandum from the DWP on the proposed amendments, the government said the new rules “are designed to confer powers capable of ensuring occupational pension schemes act and report” in line with the recommendations of the Task Force on Climate-related Financial Disclosures.
Government officials have backtracked on the application of the amendment, specifying that it will now initially only apply to large schemes.
We continue to have concerns that the way the amendment is currently drafted may still give space to future governments to direct schemes regarding determination and revision of their investment strategy
Caroline Escott, Pensions and Lifetime Savings Association
Established by the Financial Stability Board in December 2015, the TCFD is an industry-led initiative, set up to develop a set of recommendations for consistent climate-related financial risk disclosures in mainstream reporting.
The DWP clarified that the new powers “are not intended to direct pension schemes as to how they should invest”.
“This is not for the government to do,” the document added.
PLSA still has concerns
When the amendment was published, the Pensions and Lifetime Savings Association stated that parts of the proposed new legislation “appear to go significantly beyond" the current rules, and would “give unprecedented new powers to government bodies to interfere and request changes to private sector schemes’ investment strategies”.
The government clarified that its policy intention is to require trustees and managers to effectively govern their pension scheme’s exposure to the effects of climate change.
“The powers will also require schemes to publish information in accordance with secondary legislation and guidance issued by the secretary of state,” it noted.
Caroline Escott, policy lead investment and stewardship at the PLSA, said the trade body appreciates that the government is taking steps to reassure pension schemes and it supports “their intention to require trustees and managers to ensure their pension scheme has appropriate governance in place to manage, integrate and report on their climate risk approach”.
Ms Escott added: “However, alongside our legal advisers, we continue to have concerns that the way the amendment is currently drafted may still give space to future governments to direct schemes regarding determination and revision of their investment strategy.”
She noted that the PLSA is working constructively with its members and the DWP to “explore whether some small tweaks can be made to the drafting to ensure it better aligns with the government’s policy intent and approach”.
Neil Bowden, partner at Allen & Overy, noted that the full detail of the new rules will only be known with secondary legislation. "It is helpful that there will be extensive consultation on future regulations so that we can feed back any concerns."
However, he noted that "trustees need to be taking climate change risk and ESG issues seriously – this is a known government priority and we are seeing this ramp up".
Requirements to start with large schemes
Despite stating that the new requirements will cover all occupational pension schemes – including both defined benefit and defined contribution plans – the DWP now anticipates that the rules will initially be limited to larger schemes.
Nevertheless, “the fiduciary duty of trustees means that all schemes should be taking account of climate risk in an appropriate and proportionate way”, the paper stated.
Anna Copestake, partner at Arc Pensions Law, noted that this clarification from the DWP is “helpful and reassuring” and said that “elbowing large schemes in the right direction is a good starting place”.
However, she expressed reservations about the drafting of regulation-making powers, which risk being wider than the policy intent.
“If we’re not going to see any further changes via parliamentary debate then we’ll need to see what the regulations and statutory guidance say," she said.
“It’d be great if they provided a really practical and clear framework. We need to be clear with trustees about what is expected from them, and equip them to leverage their buying power over other parts of the investment chain.”
Knock-on effect to schemes' investments
Sophia Heathcoat, senior client manager at Cardano, said there “will likely be a knock-on effect, particularly for trustees of large schemes being challenged if they are not seen to be reducing the carbon footprint of their portfolio”.
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“In turn, this could impact market pricing, with pension schemes chasing similar assets,” she added.
The government has already introduced new rules on environmental, social and governance risks, which came into force last year. All trust-based occupational pension schemes with at least 100 members are required to prepare and review their statement of investment principles at least every three years or after any significant change in investment policy, including policies on “financially material” considerations.
Since October 2019, DC schemes have been obliged to make their SIP freely available on a website, and a year later they must produce an implementation report that explains how they have followed and acted on the investment policies outlined in the SIP.
