New mandatory climate impact measurements to be introduced for UK pension schemes

The Department for Work and Pensions (DWP) has confirmed that it will introduce new requirements for UK pension schemes to assess whether their investments are aligned with the Paris Agreement on climate from this October.

New mandatory climate impact measurements to be introduced for UK pension schemes

The mandate will help businesses and individuals see the climate impact of their pension scheme choices

In documents published on Friday (17 June) following a consultation on measures to improve climate reporting by pension schemes, the DWP confirmed that pension schemes will be required by legal mandate to measure and disclose how their investments are aligned with – or misaligned with – the Paris Agreement’s 1.5C temperature pathway. Reporting must be made available publicly and trustees must pledge that the reported information is accurate and detailed as they are able to gather.

The mandate stops short, at this stage, of requiring all misaligned funds to be brought in line with 1.5C within a certain timeframe. Instead, the aim is for the information provided through the reports to help those using pension schemes to make more informed decisions. Schemes with poor climate ambitions and weak climate action can expect to lose support from businesses and individual savers.

The DWP’s disclosure requirement will come into effect this October for large pension schemes and be extended to smaller schemes in the subsequent months and years. The DWP stated that, from this October, more than 80% of UK residents enrolled in a pension scheme will see changes to their disclosures.

The documents reveal that many stakeholders in the pension sector had expressed concerns about whether disclosures would be made using a shared methodology. As such, the DWP has updated statutory guidance, stating that trustees should always describe the methodology and data assumptions used when measuring the climate impact of their investments.

Some pension schemes also expressed concerns that producing the new required disclosures would be costly, especially for small schemes who would need to use consultants. But some larger schemes said the requirements should “not add significant cost” and are “totally appropriate to continue to drive up standards of governance and reporting to help achieve important societal aims”.

The UK’s pension sector represents almost £3trn of assets under management and investments. A Pensions and Lifetime Savings Association survey this month found that75% of UK pension schemes have announced a net-zero target. But s of January, schemes covering just £1trn had set net-zero targets deemed “robust” by campaign group Make My Money Matter.

“We are making sure our pensions can be a superpower delivering prosperity for people – and the planet – by making changes to the rules about how they are managed,” said Work and Pensions Secretary Therese Coffey.

Also noted in the DWP’s documents was confirmation that the Department is set to trial a ‘Green Nudge’ programme with pension scheme members later this year. The scheme will urge members to look into the environmental impacts of their pension scheme and to engage with their provider if they believe they are lagging on climate.

Make My Money Matter claims that choosing a ‘green’ pension is the single most impactful way for the average adult in the UK to reduce their individual carbon footprint. This switch, it claims, could result in emissions reductions 21 times higher than an individual giving up flying, switching to a renewable electricity supplier and becoming vegetarian.

The organisation’s campaign director David Hayman said the new DWP requirements are “are a step in the right direction, providing improved transparency for members to understand the progress made by their pension scheme on climate goals, and providing further guidance on robust stewardship for impact.”

However, Hayman cautioned: “If we truly want to tackle the climate emergency, what we need is to translate disclosure, reporting, and guidance into urgency and action. Aligning with the Paris Climate Agreement – and thereby avoiding the worst effects of the climate crisis – means setting and delivering ambitious targets that halve emissions this decade.”


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