Trust-based pension schemes will be required to publish their net-zero credentials under new metrics that will enable greater comparability of decarbonisation strategies.
Published today ahead of next month’s COP26 conference in Glasgow, the new rules will require trustees to measure and disclose a portfolio alignment metric that demonstrates their convergence with the goals of the Paris climate agreement.
But pressure groups have attacked the proposals as not going far enough, saying disclosure alone is insufficient to change the approach of the 70 per cent of leading schemes that have not yet outlined climate transition plans.
The DWP is moving to put measurement and reporting of a portfolio alignment metric on a statutory footing, mandating it as a 4th metric to be included in schemes’ Task-force on Climate-related Financial Disclosures (TCFD) reports.
Schemes can adopt their own metrics for measuring and reporting their Paris alignment but the consultation includes three proposed approaches:
- binary target measurements that measure the alignment of a portfolio with a given climate outcome based on the percentage of investments or counterparties in that portfolio that (a) have declared net-zero/Paris-alignment targets and (b) are already net zero/Paris aligned
- benchmark divergence models that assess portfolio alignment by comparing the forecasted emissions performance of investments or counterparties in the portfolio against one or more benchmarks
- implied temperature rise (ITR) models: these tools translate an assessment of alignment/ misalignment with a benchmark into a measure of the consequences of that alignment/misalignment in the form of a temperature score
The Government says that while no methodological standardisation between portfolio alignment metrics currently exists, this is the most appropriate approach.
The DWP says pursuing efforts to limit the global average temperature increase to 1.5 degrees Celsius above pre-industrial levels should be the baseline that trustees must measure and report against when considering their degree of Paris alignment. It says this recognises the global shift from focus on the Paris agreement’s climate goal of holding the global average temperature increase to well below 2 degrees Celsius, to its 1.5 degrees Celsius goal, which requires net zero emissions by 2050. This shift reflects improvements in the scientific consensus around the impact of climate change, as set out in the IPCC’s report on Global Warming of 1.5 degrees Celsius.
The new proposals will require trustees to calculate and disclose a portfolio alignment metric setting out the extent to which their investments are aligned with the goal of limiting the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levels.
Since October 1 this year TCFD already require larger occupational pension schemes, and all authorised schemes to assess, measure and report on climate-related risks and opportunities.
Guidance for asset owners now recommends that they describe the extent to which assets they own and their funds and investment strategies are aligned with a well below 2 degrees Celsius scenario, using whichever approach or metrics best suit their organisational context or capabilities. Asset owners should also indicate which asset classes are included.
The new rules requiring metrics disclosure are due to come in from October 2022.
A statement from secretary of state for work and pensions Thérèse Coffey MP and pensions minister Guy Opperman MP says: “We understand we are asking a lot of occupational pensions schemes and wish to
thank trustees for showing great leadership. 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.
“To get the best possible outcomes for members, we must prioritise stewardship. Building on the recommendations of the Taskforce on Pension Scheme Voting Implementation, we are also consulting on new statutory and non-statutory guidance which seeks to provide the clarity trustees have requested around stewardship, including voting and engagement, as well as to lessen reporting burdens.
“These proposals are intended to support pensions schemes to play their part in tackling climate change and protect their members’ savings from environmental, social and governance risks.
Make My Money Matter CEO Tony Burdon says: “With just days to go until COP26, the Government is recognising the critical role pensions must play in tackling the climate crisis. While we applaud the new measures outlined by Secretary of State Thérèse Coffey, including reporting on Paris alignment of pension schemes, they still do not go far enough.
“Because we know that reporting alone is not enough, nor is waiting for voluntary commitments sufficient. Our own research shows that 70 per cent of leading schemes are yet to outline credible climate transition plans in spite of growing consumer pressure, industry awareness, and climate science.
“That’s why we need government to take urgent action, and make net zero mandatory for all pension schemes. In doing so the UK can lead the world on green finance, dramatically reduce our emissions, and protect savers investments from the worst ravages of climate change”
AJ Bell head of retirement policy Tom Selby says: “The Government hopes that by shining a light on the environmental impact of pension investments, over £1.3 trillion of assets will be marshalled towards companies and funds that are either sustainable or have set out concrete plans to ‘decarbonise’.
“Given the significant investment heft of retirement funds it makes perfect sense for policymakers to use pensions legislation to try to force through change.
“However, this will not be easy – devising reliable metrics on the environmental impact of stocks and funds is not an exact science, while trustees of pension schemes will continue to prioritise maximising long-term investment returns for members. Many would argue these aims can – and indeed should – go hand-in-hand.
“What’s more, just because climate reporting metrics are mandated, it doesn’t necessarily guarantee either a shift in investment focus or the broader member engagement needed to really push through meaningful behavioural change.
“Ultimately achieving the Paris goal requires a seismic shift in the way we as a society act, with improved disclosure representing just one piece of the puzzle.”