Dear Colleague,
30 Days to COP26
With only 30 days to COP26, I am writing to set out how the UK pensions sector is genuinely world leading on the climate agenda – delivering safer, better and greener pensions. Climate change is the defining challenge of our time. With almost £2 trillion in assets under management, all occupational pension schemes – irrespective of their size, structure or investment strategy - are exposed to climate-related risks. That is why we are ensuring that pension scheme governance is as robust as possible to withstand these risks, in both the short and long-term. In 2018, DWP introduced regulations that require trustees to develop their policies on environmental, social and governance (ESG) matters, and on how they engage with the companies in which they invest. These regulations also introduced a requirement for trustees of defined contribution pension schemes to report on how their investment policies have been put into action and make this information publicly available online.
We also expect pension schemes to consider broader sustainability risks and opportunities - in particular - not leaving the ‘S’ in ESG behind.
In March, DWP published a Call for Evidence called the “Consideration of social risks and opportunities by occupational pension schemes”. It sought views on whether pension schemes have policies on financially material social factors, and if so, how social risks and opportunities are managed by schemes. We will analyse these responses this Autumn and set out appropriate next steps. Further, the provisions included in the Pension Schemes Act 2021 are now coming into force.
On 6 July, this House approved the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021. These regulations embed the recommendations of the international Task Force on Climate-related Financial Disclosures (TCFD) into UK law and will come into force on 1 October 2021. These regulations require trustees of larger occupational pension schemes, authorised master trusts and authorised collective defined contribution schemes (CDCs) to undertake the identification, assessment and management of climate-related risks and opportunities. This includes requirements relating to governance, strategy and risk management, and requirements to select and calculate climate-related metrics and to set and measure performance against targets.
By the end of 2022, the risks and opportunities climate change poses to £1.33 trillion of pension savings will be assessed and managed in line with these regulations, and set for publication, providing much enhanced transparency. Ahead of COP26, DWP is reviewing further measures in a public consultation to ensure trustees are doing all they can to manage climate risk. As already previewed to industry in August 2020, I will be asking pension schemes to measure and report their portfolio’s alignment with the Paris Agreement on climate change. This will allow schemes to assess their exposure to transition risks, highlighting firms which are furthest from alignment with climate goals or which contribute most to climate change. We were unable to pursue this earlier, as there was still substantial work being undertaken by industry to refine methodologies and enable consistent, comparable, and robust reporting. The dial has now shifted, with the TCFD set to publish updated guidance in October, recommending that financial institutions should measure and disclose the extent to which their activities are Paris aligned. Taken together with our TCFD requirements, this metric will be decision useful for trustees, while also being a powerful tool for communicating a scheme’s progress in transitioning to Net Zero to members. It should be noted that Government continues to believe blanket divestment from certain assets is the wrong approach – engagement with high-carbon companies, when done effectively, can reduce the climate risk to which the scheme is exposed, and DWP will support schemes with the changes we have laid out in this letter wherever we can.
In July, DWP launched the Occupational Pensions Stewardship Council to accelerate progress to address the lack of integration of stewardship across the investment process. I now intend to consult on guidance which seeks to help trustees fully understand their requirements on stewardship and voting and how they should report these activities in their annual Implementation Statement. On all of these matters, the UK is the most progressive and ambitious country in the world and therefore presents huge opportunities for global investment.
