The Government should continue to support the development of green gilts to mitigate the risk of a green asset bubble as big-scale investors move assets to net-zero strategies, says an influential committee of MPs.
The Work and Pensions Select Committee has today warned that the limited number of suitable green assets available for pension schemes to invest in risks creating a green asset bubble in the short term.
The committee says the Government should set out a UK climate roadmap to provide greater certainty for pension schemes and other investors, particularly for those investing in long-term investments such as infrastructure.
It argues divestment – where assets already held by a pension scheme are sold – should only ever be a last resort where assets are unable to reduce their contribution to climate change, says the WPSC, adding that encouraging behaviour change in companies through good stewardship is more likely to be an effective approach to help the real economy transition to net zero.
The committee calls on the DWP to set out what specific steps it is taking to ensure that its policies do not incentivise divestment over good stewardship—while making clear that schemes could nevertheless consider divestment when there is no other option.
A report from the committee recommends that the Government should use COP26 to try to secure international commitments to work towards the global harmonisation of climate-related reporting standards.
It says the UK should play an active role in encouraging and facilitating other economies to require pension scheme trustees to fully consider and disclose their climate-related financial risks and opportunities. as set out in the Pension Schemes Act 2021.
It adds that the Government’s planned green taxonomy – a common framework for determining which activities of firms and investments can be defined as environmentally sustainable – should align with international standards as far as possible.
The committee also encourages schemes to consider setting net zero targets and recommends that the Pensions Regulator should provide guidance.
Stephen Timms MP, chair of the Work and Pensions Committee, says:
“The challenges of climate change can be met only by countries coming together. With pension investments unrestrained by borders, international agreement is going to be key if the potential for pension schemes to contribute to cutting carbon emissions is to be realised. Hosting COP26 provides the UK with a unique opportunity to build an international consensus on reporting standards and stewardship and the Government must seize it with both hands.
“While taking a lead on pushing for the global harmonisation of climate-related reporting requirements, the UK must not let up in implementing high standards of reporting and disclosures domestically.
“Pension schemes can play a major role in helping the real economy transition to net zero but encouraging companies to become more sustainable through good and effective stewardship should always be the first step before moves to sell off assets that are unable to reduce their contribution to climate change. The Government needs to ensure that its policies do not incentivise divestment over good stewardship of schemes.”
Aviva managing director, UK savings & retirement Rob Barker says: “As the Work and Pensions Committee’s report makes clear, pensions have huge potential to help tackle climate change. With over five million pension customers, we take our responsibility very seriously. We know that climate change matters to our customers. That’s why we’ve announced a plan to meet Net Zero by 2040 – the most demanding target of any major insurance company in the world today. We welcome the Committee’s report and encourage the government and pension providers to work together to drive the net-zero transition at the pace and scale required.”
Make My Money Matter CEO Tony Burdon says: “We are pleased to see that pensions, and the role of wider finance, are on the agenda for our Government at COP26 this year, and echo the Committee’s calls to build a consensus on the role of schemes in tackling climate change and meet UK emissions reduction targets.
“But with the majority of pension schemes still failing to make robust net zero commitments, time is running out, and we must act with greater urgency if we are to use our pension power to truly tackle the climate crisis. That’s why we’re calling on the Government to mandate for all schemes to align to net zero at COP26 this year. That way, we can ensure our pensions take advantage of the green industrial revolution, while protecting savers from the ravages of global warming.”