UK climate change portfolio alignment rules to go ahead despite industry pressure

Carolyn Saunders, pensions and investments expert at Pinsent Masons, said stakeholders’ calls for more time to implement the new portfolio alignment reporting rules were “unsurprising”, but added that “climate change won’t wait for the industry to develop better tools and methodologies.”

Last week, ministers confirmed that all in-scope schemes must comply with new rules that will require trustees to measure and report on their investment portfolios’ alignment with the Paris Agreement on climate change from 1 October 2022 as planned. Trustees will be able to choose the portfolio alignment tool which reflects their scheme’s specific circumstances and measure and report on portfolio alignment “as far as they are able” - a standard already applied to other existing climate reporting obligations.

The new requirement will apply to trustees of all authorised master trusts and authorised collective defined contribution schemes, as well as trustees of schemes with relevant assets in excess of £1 billion.

It comes after Department for Work and Pensions (DWP) published its response to a consultation on proposed regulations which confirmed that it did not intend to change the scope or timing of the reforms. The DWP insisted the measures had to be implemented “without delay” and called on the industry to acknowledge the “urgency of the threat climate change presents”.

A number of consultation respondents had called for more time to make the necessary changes. They voiced concerns that allowing trustees the flexibility to select a portfolio alignment tool of their choice could leave them vulnerable to being upsold less credible options while they waited for market standardisation to take place.

Saunders said: “It’s unsurprising that there was some pushback around the timing of these reforms, because no one likes doing things imperfectly. But climate change won’t wait for the industry to develop better tools and methodologies and so trustees can expect to feel, on occasion, that they are operating outside of their natural comfort zone.”

The DWP said that a delay was unnecessary since all in-scope schemes should already have the governance capacity and expertise to measure at least a binary portfolio alignment metric. It added that the “as far as they are able” standard would help schemes address any data availability concerns. Alongside its consultation response, the DWP revised its statutory guidance to take account of the new requirements and published new statutory and non-statutory guidance intended to improve schemes’ stewardship and engagement practices.

Saunders said: “Going back to first principles is key  – namely, decision-making based on robust governance and a proportionate approach, taking account of relevant factors and ignoring irrelevant ones. The ‘as far as they are able’ condition aligns with this and ever closer collaboration across the industry will give trustees the confidence needed to manage climate risks and opportunities effectively”