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The government is consulting on aligning pension fund portfolio disclosures with the Paris Agreement, after the Task Force on Climate-related Financial Disclosures updated its guidance last week. The consultation also seeks industry's views on new stewardship guidance.
As the UK has pledged to be net zero emissions by 2050 and COP26 – the UN’s climate conference to be held in Glasgow next month – is around the corner, the Department for Work and Pensions is bringing forward proposals and draft amending regulations on climate reporting. These will require trustees to measure “as far as they are able” and report on their investment portfolios’ Paris alignment, going further than current climate risk rules. The Paris Agreement is a legally binding international treaty on climate change adopted at COP21 six years ago. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.
Rules for master trusts and schemes over £5bn to manage climate risk and begin to report on this in line with the TCFD only came into force at the start of this month, but the government said it was unable to include the Paris measure in its original package as more work was needed to refine methodologies and ensure consistent and comparable reporting.
The new proposals mean pension funds would need to select and calculate a relevant portfolio alignment metric and to report on that metric in their TCFD report.
Requiring pension funds to report on Paris alignment will help inform trustees’ investment decisions, stewardship and voting, said work and pensions secretary Therese Coffey and pensions minister Guy Opperman, adding that the proposals reflect industry calls for methodological flexibility, while reassuring trustees that they will be supported with updates to statutory guidance.
“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,” the two ministers said.
The pensions minister and the DWP had previously indicated that Paris alignment was on the cards. In March 2020, Opperman said he was interested in schemes reporting on Paris alignment “as a more compelling way of how schemes can measure risk”, and in August last year, the DWP said that “we are... not consulting on Paris alignment and [implied temperature rise] in this consultation but intend to do so in the near future”.
The Pensions Regulator has welcomed the proposals. David Fairs, executive director of regulatory policy, analysis and advice, said: “Some schemes already recognise the risk to pension pots from climate change and the potential opportunities from the transition to net zero that will be needed to meet the Paris Agreement’s goals and have voluntarily adopted net zero targets. These recommendations will require more schemes to recognise those risks and opportunities and enable them to clearly communicate their progress on addressing them to savers.”
There have recently been suggestions that the government should mandate net zero for pension funds, with the Work and Pensions Committee recommending the government consult on this, and campaign group Make My Money Matter calling for making net zero mandatory.
A step change in stewardship?
As well as proposing disclosures in line with a 1.5 degree scenario, the DWP wants to hear from industry on new non-statutory stewardship guidance and draft statutory guidance outlining expectations for the implementation statements pension funds have to produce.
The guidance builds on the recommendations of the Taskforce on Pension Scheme Voting Implementation published last month, which among other things recommended that all asset managers must give investors - including those in pooled funds - the opportunity to make an ‘expression of wish’ with regard to their shareholdings.
The DWP’s new consultation asks if a stewardship template would be helpful, and whether there should be a separate engagement template, among others.
The ministers said: “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."
Some asset managers have started giving a wider range of investors access to voting. BlackRock said earlier this month it is introducing a new ‘menu’ of shareholder voting for index and pooled fund investors from next year. In February this year, Willis Towers Watson's institutional platform the Asset Management Exchange and asset manager DWS, working in partnership with Northern Trust and Minerva Analytics, created a tool that aggregates investor stewardship preferences in pooled funds and seeks to execute votes in alignment with their expressions of wish.
The consultation closes on 6 January 2022.
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