The UK’s Department for Work & Pensions (DWP) is consulting on whether it should force trustees of large occupational pension schemes to address climate change risks in their governance, and risk management approaches.
The consultation opened on Wednesday (26 August), inviting views on whether the DWP should require trustees to have formal metrics and targets in place to assess climate risks and opportunities within their investment portfolios.
It is also considering forcing trustees to make disclosures on climate issues in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
“Trustees need a long-term perspective, even in their short-term decision-making,” Pensions minister, Guy Opperman, said in a statement accompanying the announcement.
“Acting now to manage climate risks, and to take advantage of the opportunity of the low-carbon transition, will put schemes in a stronger position for the future.”
Opperman said he believed that the proposals put forward are “proportionate” given the “size and urgency of the threat”.
He added: “I recognise that these proposals come as trustees are dealing with the impact of the COVID-19 pandemic. However, this is also a time of opportunity – as we build back better, trustees must turn their minds to the transition to the low carbon economy.
“We must ensure that pension scheme governance is as robust as possible to withstand the potential shocks that climate change and our response to it will bring.”
The reaction from many stakeholders across the industry was broadly positive in the initial hours following the announcement.
There was broad agreement that some trustees had been struggling to structure ESG approaches until now, with many simply unable to agree the best way forward on climate risks emerging from the transition to a low carbon economy.
“Whilst most trustees accept the importance of managing climate risks and opportunities, many have struggled with understanding how best to do this,” said Carolyn Saunders, head of pensions and long term savings at Pinsent Masons.
“The detailed regulations and statutory guidance being proposed will help the trustees to whom they apply navigate this difficult area by providing real focus and support that will empower them to drive the development of the data and tools needed for effective decision-making.”
Saunders added that trustees should take confidence from the strong confirmation that they should be addressing climate risk, even though climate risk analysis is “not a perfect science”.
She added: “The promise of a future consultation on Paris-alignment reporting and measuring the warming potential of a scheme’s portfolio, raises the genuinely exciting prospect of identifying an easily-understood and consistent measure which will drive best-practice.”
Simon Jones, head of responsible investment at Hymans Robertson, agreed and welcomed the government’s decision to explore further measures.
“Pension funds will only contribute to the mitigation of climate risk through the reallocation of capital or by driving changes in behaviour,” he said. “This continued focus on climate risk is welcome and we are particularly encouraged that this consultation looks beyond just disclosure to the underlying actions that trustees are expected to take in developing their approach.
“Looking beyond the risks associated with climate change to the potential opportunities to influence or create change must become a part of asset owners mindset.”
The consultation will remain open for responses from industry stakeholders until 7 October 2020 at 2345hrs.