Pension fund investors could face further disclosure requirements on ESG matters as an industry working group considers fresh law for trustees for as soon as next year.
The government and The Pensions Regulator (TPR) have established a joint working group to develop guidance for pension schemes on reporting in-line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
According to the government's Green Finance Strategy - published today (2 July) - the watchdog will consult on the working group's agreed guidance later this year, with "a view to putting it on a statutory footing" next year as part of the governance code.
The working group is chaired by Sackers partner Stuart O'Brien and also includes pension scheme trustees, investment managers, data providers and other groups. It also comprises representatives from the Department for Work and Pensions, the Department for Business, Energy and Industrial Strategy (BEIS), and TPR.
The TCFD's recommendations include disclosure of how organisations react to climate-related risks and opportunities in terms of governance; actual and potential impacts; methods of identification, assessment and management; and metrics and targets.
The strategy comes after the House of Commons last week passed regulations committing the UK to reduce carbon emissions to net zero by 2050, but some have warned greater incentives are needed to convince pension funds to invest for such a future.
WHEB Asset Management partner and head of research Seb Beloe said the move was "clearly a welcome step" but agreed there was too little action on opportunities in this space.
"At the very least, a requirement for disclosure from pension funds should encourage these funds to develop a more sophisticated and systematic response to climate change," he said. "However, the problem with the TCFD is that it is largely focused on addressing climate-related risks and has relatively little to say about climate-related investment opportunities.
"In order to achieve the net-zero carbon target by 2050, we need both to rapidly wind down carbon intensive activities, but also rapidly increase low- and zero-carbon activities. The TCFD and the Green Finance Strategy have added far too little to the latter."
The additional reporting would come hot on the heels of similar ESG disclosure regulations which have not yet come into force. From October, pension schemes will need to reveal how their investment strategies consider financially-material ESG risks, including climate change.
Last week, TPR published updated guidance to inform defined contribution (DC) schemes on how to comply with the upcoming changes, while pensions and financial inclusion minister Guy Opperman told the industry it was best-placed to act as the "past masters of thinking long term".
‘Core financial risk'
Published jointly by HM Treasury and BEIS, today's strategy also outlines plans to further clarify responsibilities for the Prudential Regulation Authority, the Financial Conduct Authority (FCA) and the Financial Policy Committee to have regard to the Paris Agreement when carrying out their duties.
TPR will also see part of its budget earmarked for climate-related financial issues, as the DWP will update its letter setting out the annual budget allocation.
The watchdog has also published a joint statement on climate change with the FCA and Financial Reporting Council (FRC), affirming their commitment to tackling climate change. The statement notes climate change "presents far-reaching financial risks relevant to our mandates both from physical factors, such as extreme weather events, and transition risks that can arise from the process of adjustment to a carbon-neutral economy".
TPR chief executive Charles Counsell said climate change was "no longer simply a social responsibility issue" but a "core financial risk impacting broadly across business, the economy and markets".
"Climate change is a risk to long-term sustainability [that] pension trustees need to consider when setting and implementing investment strategy, while many schemes are also supported by employers whose financial positions and prospects for growth are dependent on current and future policies and developments in relation to climate change.
"Tackling poor standards of governance and risk management in pensions are priorities for TPR and we welcome working together with other regulators to address these challenges for pension schemes."
The strategy was published as pension providers continue to boost their ESG credentials, with Aviva today announcing it has launched a DC default strategy integrating ESG and ethical considerations throughout the growth and consolidation phases of saving.
Tim Shepherd and Beth Brown look at the legal implications of working from home and how pension professionals can mitigate the risks.
The government will set up an infrastructure bank to support investment and to co-invest alongside investors including pension funds.
The Retail Prices Index (RPI) will be reformed and aligned with the housing cost-based version of the Consumer Prices Index, known as CPIH, by 2030, the Treasury has confirmed.
Estatee agent denies a shareholder’s absence from voting is an issue, finds Minerva Analytics.