The government has announced plans to require trustees to measure and report how their investment portfolios are aligned to the Paris Agreement.
The Department for Work and Pensions (DWP) launched a consultation today (21 October) seeking views on the policy proposals on Paris alignment reporting, accompanying draft regulations and statutory guidance, and draft statutory/non-statutory guidance explaining the DWP's expectations on implementation statement reporting and the statement of investment principals (SIP).
The government proposed amending the Occupational Pension Schemes Regulations 2021 to require relevant trustees to calculate and report how their investment portfolios align with the Paris Agreement of limiting global warming to 1.5C.
The proposals follow industry calls for "methodological flexibility" and the DWP said trustees will be supported with updates to statutory guidance.
British savers have around £1.33trn invested in pension schemes, and the DWP said by the end of 2022, the climate risk to all these savings will be assessed, and in time, published "for the benefit of the saver".
The DWP also proposed new guidance and best practice on stewardship and voting activities on ESG matters.
It 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, the government department is 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".
Secretary of state for work and pensions Thérèse Coffey said: "Pensions can be the superpower in delivering prosperity for people and the planet in the race to net zero.
"Climate change is happening and it is accelerating so the world needs to work together to protect our planet and the UK has been leading in terms of our ambition."
She said pension funds have "huge investing power" and noted the sector has a "massive part to play to help the UK get to net zero".
She said the UK has seen a "vast improvement" just in the last 12 months on climate change commitments, with around 85% of defined contribution savers now in a scheme with a net-zero target and six of the top ten defined benefit schemes having made net-zero commitments.
But she warned the UK "needs to go further to harness the full power of pensions".
"With the capital clout to drive investment in green technology, pensions can become superpower in the fight against climate change," she argued.
"Managing the transition [to net zero] is not just about regulation and box ticking… Done well, stewardship in schemes is crucial to securing good outcomes for savers."
She said the DWP's stewardship proposals "will help support trustees monitor, engage, and where necessary, intervene".
Coffey added: "Our latest reforms will empower savers to clearly see how their money is being invested by trustees. Measures may seem techy, but they are transformational."
She also urged other countries to follow suit.
The Pensions Regulator executive director of regulatory policy, analysis and advice David Fairs said: "We welcome plans to require the largest pension schemes to be clear about how far their investments align with the Paris Agreement's ambition to curb global temperature rises.
"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."
ShareAction welcomed the DWP "leading the way on setting expectations for stewardship expectations and Paris alignment reporting to drive up standards across the pensions sector".
Head of UK policy Fergus Moffatt said: "As the rest of government consults on TCFD reporting, the DWP has already made it law for pension schemes. Some will say that the DWP is going too fast but we think this illustrates that the rest of government is moving too slowly.
"We warmly welcome the DWP's proposals to require schemes to report on the extent to which their portfolios are aligned with the Paris Agreement on climate change. Aligning private capital with the objectives of the Paris Agreement - to limit the increase in global average temperature rises to 1.5C above pre-industrial levels - will help to scale up financial flows moving towards sustainable investments and help to tackle the threat of climate change.
"We see trustees reporting alignment as a powerful communication tool to help themselves, scheme members, and the regulator to understand the scheme's position on climate risk. We think that this additional metric will be a significant addition to trustees' TCFD reports."
He added: "We also strongly support proposals on new guidance for trustees relating to the SIP and the implementation statement. As well as being an essential tool through which trustees can enhance investment returns, stewardship also leads to broader sustainable benefits for the economy, the environment and society and will be vital to meeting the goals of the Paris Agreement.
"The new guidance geared towards improving the quality of SIP reporting, developing best practice for implementation statement reporting, and improving consistency and comparability across the board is therefore extremely welcome. We particularly support the emphasis on trustees taking ownership of these reports and not delegating responsibility to asset managers and advisers.
"Taken as a package of measures, these proposals will go a long way towards driving up standards across the pensions sector."
ClientEarth lawyer Joanne Etherton commented: "The government's proposals are an encouraging move, helping pension schemes assess their progress in aligning their investments with net-zero goals and improve understanding on stewardship best practice.
"Use of portfolio alignment metrics will help pension savers to see whether their provider is acting on climate change and to identify laggards that are failing to change at the pace we critically need - heightening the regulatory risk for schemes dragging their feet on climate action.
"But the clock is ticking. While action to make investment portfolios and stewardship activities consistent with pathways to limit global heating to 1.5C should have happened yesterday, these measures are a positive step."
The consultation closes to responses on 6 January 2022.