The COP26 climate conference in November provides a major opportunity for the UK to make every endeavour to build an international consensus on the role of pension schemes in achieving the goals of the Paris Agreement and to push towards global harmonisation of climate-related financial disclosures, according to the Work and Pensions Committee.
In a new report, the Committee makes recommendations on reporting standards, pension scheme governance and investment and stewardship.
Harmonising climate-related reporting standards would considerably reduce the burden and costs to pension schemes given the global nature of assets and investments, the report says, but the Committee adds that work towards this must not be a barrier to the UK rapidly implementing its own high standards.
Stephen Timms MP, Chair of the Work and Pensions Committee, commented: “The challenges of climate change can be met only by countries coming together.
“With pension investments unrestrained by borders, international agreement is going to be key if the potential for pension schemes to contribute to cutting carbon emissions is to be realised.
“Hosting COP26 provides the UK with a unique opportunity to build an international consensus on reporting standards and stewardship and the Government must seize it with both hands.
“While taking a lead on pushing for the global harmonisation of climate-related reporting requirements, the UK must not let up in implementing high standards of reporting and disclosures domestically.
“Pension schemes can play a major role in helping the real economy transition to net zero but encouraging companies to become more sustainable through good and effective stewardship should always be the first step before moves to sell off assets that are unable to reduce their contribution to climate change.
“The Government needs to ensure that its policies do not incentivise divestment over good stewardship of schemes.”
Main findings and recommendations of the report include:
- The UK should play an active role in encouraging and facilitating other economies to require pension scheme trustees to fully consider and disclose their climate-related financial risks and opportunities (as set out in the Pension Schemes Act 2021).
- The Government’s planned green taxonomy – a common framework for determining which activities of firms and investments can be defined as environmentally sustainable – will be vital in tackling climate change. It should align with international standards as far as possible.
- Larger pension schemes are usually better placed to meet the costs of making green investments. The Pensions Regulator should report annually on the progress made in consolidating schemes.
- The Committee encourages schemes to consider setting net zero targets and recommends that the Pensions Regulator should provide guidance.
- With a limited number of suitable green assets available for pension schemes to invest in, there is a risk of a ‘green asset bubble’ in the short term. The Government should continue to support the development of products, such as green gilts, to mitigate the risk.
The Government has two months to respond to the report.
The ‘Pension stewardship and COP26’-report is available on the UK Parliament website.