This is Third Generation Environmentalism (E3G)’s response to the call for evidence from the Work and Pensions committee on pension stewardship and COP26.
The Committee for Work and Pensions sought evidence on how the UK Government’s approach to pension scheme stewardship can inform, and should be informed by, approaches taken internationally, as well as the role of pension schemes in setting and achieving net zero targets towards COP26. This included whether pension schemes have suitable information to assess climate risk, and how the UK can both lead and learn from international standards and best practice.
£2.6 trillion is saved in UK pensions and, as highlighted by popular campaigns such as those by Make My Money Matter, the pensions industry has a key role to play in greening the UK financial sector. Transitioning the pension sector to net zero offers an opportunity to help drive systemic positive impacts. This is due both to the vast sums under ownership, as well as the unique characteristics of pensions schemes including the long-term investment horizons, and their relationship to individual pensions. However, there is still some way to go before the sector reaches net zero.
With the UK now committed to mandatory TCFD, the tides are changing when it comes to the availability of data across the supply chain on climate risk, which changes the dynamics for any FIs now looking to make net zero commitments. This has also been supported by the ongoing improvement in the quality and quantity of voluntary disclosures of climate-related financial information. The launch of the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) in 2017 was a pivotal moment in driving voluntary disclosure, as have been the subsequent market signals from investors, both on an individual level such as with BlackRock (see here and here), and collectively as with the Glasgow Financial Alliance for Net Zero.
We welcome the UK’s leadership and its aim to be the first G20 country to make climate-related financial disclosures mandatory across the economy. This leadership, combined with the UK’s joint Presidencies of the G7 & COP26, raises the profile of disclosure regulation on the global stage as a tool to help the private sector on its journey to net zero. The G7 communique also signalled that mandatory climate risk disclosures would be rolled out across the G7.
This progress, however, must be rapidly scaled up to provide financial institutions, including pension companies, with the information required to transition to a net zero financial sector, to enable a real economy transition, and to ensure that individual companies can strategically address the climate-related risks and opportunities facing their operations. Disclosure regulation and guidance, on a global scale, will be an indispensable lever to delivering government and industry net zero goals. This will be supported by international harmonisation of green taxonomies, standards and accountancy rules, which the UK is well placed to lead.
In the following consultation response we call on Her Majesty’s Government (HMG) to ensure that Pension companies are supported to become leaders in the race to net zero through implementing net zero targets with integrity, including short-and-medium term goals as part of their transition plans, and having access to the appropriate guidance and support on what a good transition plan looks like. HMG should also ensure that TCFD is integrated fully and to a high standard across the supply chain so that sufficient data is available for pension scheme investment decisions. The new UK Infrastructure Bank should also work with institutional investors to ensure that their needs are considered, and institutional investment can be crowded into future fit infrastructure.
Our recommendations include:
- Supporting Pension Companies to commit to further ambition ahead of COP26 by encouraging them to join the Glasgow Financial Alliance for Net Zero, under Race to Zero, and make commitments to Net Zero
- Mandating the disclosure of climate transition plans for all companies including pension companies, in addition to disclosure on material climate-related risks and opportunities. These plans should include:
- 5-year plans for near-term emissions reductions targets,
- Longer-term net zero target or end goals, and
- Any strategies for (relating prior items with) Paris Alignment.
- Further regulatory support and guidance to improve the quality of disclosure under the proposed TCFD pillars (i.e. using the 11 TCFD recommendations as a baseline) and for climate transition plans.
- The UK Green Taxonomy to be integrated across the economy to support investment decision making by FIs, including pension schemes.