Will the government mandate climate-related investment changes?
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The government could soon be able to require that schemes review their climate risk exposure and revise their investment strategy if an amendment to the pension schemes bill is passed. Is this an overdue push for a laggard industry or undue intervention in investment matters?
On Tuesday, minister for work and pensions Baroness Deborah Stedman-Scott tabled an amendment to the pension schemes bill which makes provisions for climate risk regulations. Such regulations, if implemented, could require schemes to assess the assets of the scheme in a specific way, and determine, review and if necessary, revise the strategy for managing the scheme’s exposure to specific risks.
They could also be required to report in set way on climate risk.
The amendment is thought to be partly in preparation for the changes announced in the Green Finance Strategy last July, which said that “the government expects all listed companies and large asset owners to be disclosing in line with the [Task Force on Climate-related Financial Disclosures] recommendations by 2022”. The TCFD is an international group with influencers from the largest companies and pension funds. It publishes recommendations and status reports on climate-related financial reporting.
But Stedman-Scott's amendment has stirred controversy through its use of the word ‘revise’, which could allow the government to dictate how private pension schemes should invest – an area considered sacrosanct in the industry.
PLSA calls for redraft
A vocal response came from the Pensions and Lifetime Savings Assocation. Its head of DB, LGPS and standards, Joe Dabrowski, said whilst the association supports initiatives that help pension schemes with assessing climate change risks, “parts of these new amendments appear to go significantly beyond current requirements for schemes to disclose what they are doing on scheme investment around climate change and would give unprecedented new powers to government bodies to interfere and request changes to private sector schemes’ investment strategies”.
Any intervention “would set a dangerous precedent and be wholly inappropriate”, he added, calling for a redraft of the amendment.
It is not the first time the industry is clashing with government over what it perceives to be undue intervention in investment strategies. Some in the Local Government Pension Scheme heavily criticised the obligation on funds to invest in infrastructure, and the Court of Appeal previously ruled that LGPS funds must not have divestment policies that run counter to UK foreign and defence policy; the case was heard in the Supreme Court last November.
In the private sector, the government is also seeking to harness pensions money to boost innovation and economic growth through investment in so-called patient capital.
But campaigners have applauded the recent amendment. Fergus Moffatt, head of UK policy at ShareAction, said the group has been working closely with the DWP on guidance for pension schemes.
“We’re very hopeful these world-first reforms will accelerate climate action. Warm words will no longer be enough - the level of disclosure required under these laws will make it plain to see which pension schemes are really walking the talk on tackling the climate crisis and the risks it poses to our savings,” said Moffatt.
He pointed to the fact that the UK is hosting this year's United Nations Climate Change Conference, COP26. “All eyes will be on the current government to ensure this ambition reaches all areas of finance,” he noted.
Mike Clark, founder of Ario Advisory, had similar thoughts. The amendment to the pension schemes bill is "very positive", he said, building out an important part of the Green Finance Strategy.
"We are some way off from regulations being laid, but in the year when the UK hosts COP26, it is important that pension funds play their part in addressing the financial risks of climate change and seizing the opportunities which the transition to the low carbon economy will bring. They owe their beneficiaries nothing less," he said.
Is government ‘crossing the Rubicon’?
Although the new amendment does not impose immediate new regulations, it gives the government a power to do so, explained Stuart O’Brien, a partner at law firm Sackers who also chairs the Pensions Climate Risk Industry Group set up by the Pensions Regulator and tasked with producing guidance on managing and reporting on climate risk based on the TCFD.
“I suspect what they are doing here is reserving quite a broad power with an expectation they would then be consulting on regulations to implement that,” he said. Referring to the Green Finance Strategy and IORP II, which also mentioned climate change, he said that “this is just ramping up the pressure a little bit and putting regulatory power behind it".
However, he sees the precise wording of the proposed law as problematic. O'Brien said that he “winced a little bit” at seeing the word ‘revising’ used in connection with schemes’ investment strategy.
Asking trustees to take something into account is one thing, but “if trustees feel like the government is telling them what they should invest in, I think it’s legitimate for trustees to push back,” he argued. “As soon as you say regulations can require revision of strategy, you’ve crossed a bit of a Rubicon.”
The current wording could, however, still be changed in the course of the bill’s passage through parliament, and might just be “kitchen sink drafting”, he added.
Unclear how any new regulations would interact with current ones
If passed, the broad powers the change would give the government go beyond what the DWP has done so far. Since last October, schemes have been obliged to say in their statement of investment principles whether they take ESG into account, but there is no obligation to incorporate it into their investments.
“If that is the case I’m surprised by the breadth of the regulation-making powers. Government needs to be very careful if it’s giving itself powers to intervene in trustee investment strategies,” she said, because it is “far from obvious” how these would interact with trustees’ legal duties or the new SIP requirements.
She pointed out that there is also no clarity over what type of ‘prescribed’ schemes the law would capture, leaving unanswered questions for trustees.
“I’d question if this is really the best way to achieve the change that’s needed and that politicians are clearly looking to deliver,” said Copestake. “Focussing intensely and what feels like solely on trustees, rather than other participants in the investment chain, feels like a blunt instrument.”
Do you think government should reserve the right for mandating climate-related investment strategy changes?