The UK government is consulting on plans to require pension schemes to calculate and disclose a metric setting out the extent to which their investments are aligned with the goal of keeping global warming to within 1.5°C above pre-industrial levels.
Announced today, the consultation also seeks views on draft guidance explaining best practice and government expectations in relation to trustees’ statement of investment principles and their statements about how climate change and stewardship policies have been implemented.
The consultation follows the entry into force earlier this month of new reporting and governance requirements for certain pension schemes based on the Task Force on Climate-related Disclosures (TCFD) framework.
The government held back on including a portfolio alignment disclosure requirement as part of that package of rules because it considered more work was needed to refine methodologies and ensure consistent, comparable and robust reporting.
In a foreword to the new consultation, Thérèse Coffey, secretary of state for the Department for Work and Pensions (DWP), and Guy Opperman, minister for pensions and financial inclusion, said this work had now been completed, pointing to recently revised guidance from the TCFD.
This states that investors and lenders should disclose the alignment of their activities with a well-below 2°C global warming scenario.
The updated guidance was released on the same day that the Portfolio Alignment Team (PAT) delivered a final report on portfolio alignment tools, framed as a set of best practice considerations.
“We understand we are asking a lot of occupational pension schemes and wish to thank trustees for showing great leadership”
The DWP’s proposal is to require relevant trustees to measure and report on Paris alignment, with the requirement for measurement being on the basis of “as far as they are able”.
Coffey and Opperman said the government’s proposals reflected industry calls for methodological flexibility and trustees would be supported with updates to statutory guidance.
“We understand we are asking a lot of occupational pension schemes and wish to thank trustees for showing great leadership,” they said. “We want to support trustees in their climate disclosures and hope we can count on the same constructive relationship with industry to help ensure these measures help trustees and savers.”
The guidance they were consulting on, meanwhile, “seeks to provide the clarity trustees have requested around stewardship, including voting and engagement, as well as to lessen reporting burdens,” the politicians said.
Claire Jones, head of responsible investment at consultancy LCP, said the proposals on Statements of Investment Principles meant that, if the government got its way, these would no longer be one-size-fits-all, but tailored documents that reflect scheme-specific priorities.
“Requiring trustees to measure and report on the alignment of their schemes’ assets with the Paris Agreement will provide a more rounded picture than just focusing on emissions alone,” she added. “It will really help trustees understand and manage their scheme’s exposure to climate-related risks and opportunities. However, data will be a big issue. Asset managers and others will need to get better at collecting and measuring the data, particularly in relation to private market assets.”
Currently, TCFD-based requirements apply to schemes of £5bn (€5.9bn) and over and master trusts and will be extended to schemes of £1bn and over next year. If the DWP follows through with its latest proposals it would be the first country to introduce mandatory portfolio alignment disclosures.
The release of this consultation adds to a busy week for the UK government ahead of the COP26 climate change conference, for which the UK holds the presidency together with Italy.
On Monday evening it published a ‘Green Finance Roadmap,’ which indicated it would mandate disclosure of net-zero transition plans, although exactly by which actors is somewhat unclear. A day later the government published its net-zero strategy.
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