MPs mull stricter legal climate requirements for pension funds

Ed Davey has already voiced his support for the Bill

The Responsible Investment Bill is being presented to the APPG on Sustainable Finance and other MPs by research and advocacy group ShareAction today (5 November).

If enacted in its current format, the Bill would force all investors in the UK – regardless of size – to prove that their ‘default’ funds and any funds they market as ‘sustainable’ are aligned with the Paris Agreement. Those with non-alignment would be required to outline, in detail, their plans for engagement and divestment to change the climate impact of their holdings.

The Bill recognises that, despite an uptick in the offering of ‘sustainable’ thematic funds, more than 90% of individuals choose their scheme’s default fund. Such funds regularly invest in high-emitting sectors like fossil fuels, mineral extraction and heavy industry.

It also takes into account the fact that most people do not know how their pensions or funds are invested, largely due to poor transparency requirements for fund managers. The Bill would embed a “clear duty” for investors to respond to beneficiaries’ requests for information and would improve reporting requirements.

ShareAction believes that the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) are equipped to oversee compliance; the UK would not need to create a new watchdog. However, the Bill does propose the creation of a UK Council for Investor Due Diligence regarding human rights and the environment. The Council would ask investors to explain their current process for mitigating or avoiding human rights abuses and environmental crimes via the companies in their holdings.

Recent research found that more than 50 of the world’s biggest banks have collectively provided loans and underwriting worth more than $2.6trn to climate-wrecking initiatives, including illegal deforestation. And the recent FinCen files scandal outlined how the finance sector is complicit in human trafficking.

“We can and must ensure that the UK’s mighty investment industry does more to meet the long-term needs of ordinary savers, whilst avoiding investment decisions that cause grave environmental harm or violate human rights,” ShareAction’s chief executive Catherine Howarth said.

“This Bill will make powerful institutional investors accountable and transparent about the decisions they make on behalf of so many of us.”

Pensions Bill

The proposals come as the Pensions Bill is progressing through Parliament. 

In its current form, the Bill’s main climate provision is a new mandate requiring large pension schemes to disclose the climate-related risks posed to assets in their portfolios by the end of 2022, in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

Some schemes are seeking to get ahead of the curve on policy.  The UK’s largest pension scheme in terms of membership, Nest, is voluntarily divesting from any large business that derives at least 15% of its turnover from these fossil fuels. Similar divestment initiatives have been announced by the Church of England and by several of the UK’s higher education bodies, including Oxford University, the University of Manchester and the University of Gloucestershire.

Elsewhere, Aviva recently set a requirement for companies held in its auto-enrolment default pension funds to generate net-zero emissions by 2050.

Sarah George