Tougher climate change reporting proposed for UK pension schemes

Out-Law News | 12 Feb 2020 | 1:37 pm | 1 min. read

Large UK occupational pension schemes would be required to assess the impact of climate change on their investments and report that information to scheme members under plans put forward by the government.

The proposal, which is set out in an amendment to the Pension Schemes Bill, goes much further than current rules requiring pension scheme trustees to disclose how they take account of climate change and other environmental, social and governance (ESG) factors to the extent that these may have a material impact on scheme members' savings.

Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law, described the proposal as "a potential game changer for trustees".

"The resulting obligations on trustees could extend far beyond the disclosure that is the main focus of the current statutory regime to require trustees to place climate change risk and opportunity at the heart of their investment strategies," she said. "And the need to publish information relating to the effects of climate change on a scheme will increase reputational risk for trustees and scheme sponsors."

Saunders Carolyn

Carolyn Saunders

Partner, Head of Office, London and Head of Pensions & Long-Term Savings

The resulting obligations on trustees could require trustees to place climate change risk and opportunity at the heart of their investment strategies.

The changes would apply to the trustees or managers of an occupational pension scheme "of a prescribed description", to be defined by the government in regulations.

Scheme trustees or managers could be required to review the exposure of the scheme to climate change risks, to assess the impact of those risks on the scheme's assets and to produce a strategy for managing the scheme's exposure to those risks. They could also be required to assess the potential contribution of their investments to climate change.

They could also be required to set and monitor progress against targets relating to the scheme's exposure to climate change risks, and to report on that progress.

The amendment defines "effects" of climate change to cover both risks and opportunities arising from climate change, including the risks arising from steps taken by governments or regulators to mitigate the impact of climate change.

Writing in The Telegraph, outgoing Bank of England governor Mark Carney and work and pensions secretary Therese Coffey said that pension funds "have the opportunity to lead the way in how they set their long-term agenda".

"[Pension funds'] investment decisions have the power to channel funding towards companies with a plan to make the transition to net zero," they said.

"Requiring pension schemes to report on how they are considering climate change in their governance, strategies, risk management and targets will encourage financial flows towards addressing the threat of climate change to all our futures, and improve the health of our economy longer term," they said.