Guy Opperman: Climate change clauses a game changer for pension investment

I firmly believe the climate change measures in the Pension Schemes Bill will revolutionise in pension investment.

Climate change risk is almost always financially material, and it is a systemic risk, affecting all assets and all pension schemes. It's also a misunderstood risk - The Pensions Regulator's research into defined contribution (DC) schemes last year found that only a minority -  even of large schemes - consider climate change in their investment strategy.

That is why we're putting trustees' duty to manage climate risk on a statutory footing, including both minimum governance requirements and publication of climate-related risks and opportunities in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

Readers will already be aware of the proposals we consulted on earlier this year to require the largest occupational schemes to have duties to take this action, and we intend to bring forward the draft legislation and statutory guidance for consultation early next year.

This is all about risk and opportunity, and trustees' fiduciary duties to their members.

We will not mandate schemes to set net zero targets, as has been suggested. A requirement on trustees to set and implement a net zero strategy for 2050 would mean that trustees who did not keep pace with government-imposed targets in decarbonising their portfolio would breach their legal duties and be open to financial penalties. Despite the protestations of some, this would clearly direct schemes, and it would primarily spark divestment. What trustee would take the risk of engagement with an oil or gas company in the hope that their emissions would come down enough to avoid trustee penalties? Pension schemes would simply ditch all their high carbon stocks - and proudly proclaim their carbon neutrality to the members who continued to suffer from the pollution of the same firms in less scrupulous hands.

Instead, we need a whole economy transition. Our work on climate risk management is just the start - the TCFD roadmap published this month set out our journey to mandatory TCFD-aligned risk reporting across the whole investment chain, and we made further announcements on this in November.

Government is prepared to take all the steps necessary - not just to reach net zero domestically, but to lead other nations at COP26 to a new settlement which keeps global temperatures below two degrees.

We will take further steps, and they will be radical steps if they need to be. But they will be the right ones.

Guy Opperman is pensions and financial inclusion minister

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• Law and Regulation
• Guy Opperman
• Pension Schemes Bill