The Pension Schemes Bill, which has cross-party support, has been continuing its progress through Parliament. The Bill was dropped when Parliament was dissolved ahead of the December general election but has now been reintroduced.
In early February, the Government introduced amendments to the Bill relating to governance around climate change. Not all schemes will be covered by these changes; however, the expectation is that it will cover schemes above a certain size.
Whether or not their scheme finds itself within the scope of this legislation, the amendments to the Bill should make trustees pause for thought and consider their approach to climate change. The amendments are important because they signal a step change in what is expected of trustees and the likelihood is that the changes, required of the schemes covered by the legislation, will establish best practice standards for all other schemes.
To date the regulation in this area, including regulations which have yet to come into force, has focused on disclosure around environmental, social and governance (ESG) factors in general, for example, the requirements for a scheme’s statement of investment principles (SIP) to set out the scheme’s policy on financially material considerations and, from 1 October 2020, to include specific information around stewardship and how asset managers are incentivised to align with trustees’ policies.
It has also focused on the requirement for both defined contribution and defined benefit schemes to publish their SIPs online, from 1 October 2019 and 1 October 2020 respectively.
The amendments to the Pension Schemes Bill go far beyond these disclosure-style requirements. Their stated purpose is very broad – namely to ensure that there “is effective governance of the scheme with respect to the effects of climate change”. A number of requirements are listed as examples of those that may be imposed by regulation and these are also very widely drafted – for example, a requirement for assets to be assessed by reference to their exposure to risks of a prescribed description and to determine the contribution of such assets to climate change. Also, it is notable that these amendments relate specifically to climate change.
On one hand, these amendments merely encapsulate what trustees should be doing in any event – i.e. making sure that there is effective governance around climate change. Climate change is so far-reaching that it has the potential to impact on investments in many different and unexpected ways. Trustees have a fiduciary duty to take account of investment factors that are financially material and the absence of proper governance in this area will increase the risk of trustees being in breach of this duty.
On the other hand, it is apparent that many trustee boards, whilst complying with the disclosure requirements mentioned above, have not taken this further and thought about the key governance issues which lie beneath the words in the SIP. Other trustee boards, it seems, have not even complied with the basic disclosure requirements with a recent report from the UK Sustainable Investment and Finance Association finding that only one-third of a representative sample of schemes had complied with the October 2019 disclosure requirements.
These amendments are significant because of the priority given to climate change and because they will require many trustees to think more forensically about their approach to it in order to demonstrate proper governance.
Meanwhile, we can expect more developments in this area. The Department of Work and Pensions (DWP) has recently written an open letter to The Pensions Regulator, about its role in mitigating and managing climate risk, which is stated to include “promoting trustee understanding of the material financial risks posed by climate change as well as the opportunities that may arise”. In the letter, the DWP calls on the regulator to set out its climate change strategy in the coming months. This activity sits alongside a number of statements from the pensions Minister, Guy Opperman, regarding the important role of pension schemes in supporting the Government’s commitment to net zero by 2050.