Consultation outcome

Ministerial foreword

Updated 7 July 2021

This was published under the 2019 to 2022 Johnson Conservative government

Climate change is the defining challenge of our time. Our response to climate change will determine the health and prosperity not only of the world the next generation will inherit, but the world we live in now. The impacts of climate change are already being felt around the globe. The time to act is now.

We can be proud that the UK is leading the way in meeting this challenge, as the first major economy to pass a net zero emissions law. But we cannot be complacent. We need to respond urgently to the risks of climate change, especially those affecting the financial sector and wider economy, on which so much rests. We need a financial sector that recognises these risks, and opportunities, and is stronger as a result.

To enable this change, I propose embedding in pensions law the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). I make no excuse for the work this entails – we lead the way and I expect others to follow.

Earlier this year, I was pleased to support work by the Pensions Climate Risk Industry Group (PCRIG) to produce detailed guidance for trustees on aligning their pension scheme with the TCFD recommendations. I see huge value in the work the PCRIG has done to encourage trustees to follow the TCFD recommendations, and I thank everyone in industry who gave their time to make this happen. However, the time is now right to raise our standards and ambitions.

In my foreword to the PCRIG draft guidance, I set out my intention to take powers in the Pension Schemes Bill to require climate risk governance and TCFD reporting by occupational pension schemes. The Bill has now progressed through the House of Lords – but we need urgent action, so I intend to waste no time in publishing these proposals. A further consultation on regulations will follow before they are laid next year.

Trustees need a long-term perspective, even in their short-term decision-making. So I have set out Government’s long-term plan in this document. My proposals would require trustees of schemes with £5 billion or more in assets – and authorised master trusts and collective money purchase schemes – to have effective governance, strategy, risk management, and accompanying metrics and targets for the assessment and management of climate risks and opportunities from October 2021 and to report on these in line with the TCFD’s recommendations by the end of 2022. This is in line with Government’s Green Finance Strategy, and its clear expectation of large asset owners in relation to TCFD.

Some of these schemes have already started work in this area. I anticipate that they will set a benchmark of good practice and that their market power will help to improve the flow of data vital to high-quality climate risk governance.

With the roll out to schemes of £1 billion or more in assets in the following year, more than 75% of assets, and 80% of members, would be in schemes subject to the requirements. We propose to take stock in 2024 and consult on the extension to all other schemes. No pension scheme is too small to make a difference.

The document covers one topic on which I am not immediately consulting. There is increasing momentum around the idea of reporting the ‘implied temperature rise’ or ‘warming potential’ of a portfolio. This could be a powerful tool to help trustees, and their members, to understand their scheme’s exposure to climate change risk. There is substantial work being undertaken by industry to refine methodologies and enable consistent, comparable, and robust reporting. I therefore intend to consult on mandatory ‘Paris alignment reporting’ soon. Let me be clear, however, that none of these proposals – or future proposals – will attempt to direct trustees in their investment decisions; that discretion will remain with trustees.

I acknowledge also that for many trustees these disclosures will be a new process and a learning curve. They will be supported in this work by statutory guidance. This consultation seeks views on what that guidance should cover. Trustees will also be able to draw on the PCRIG’s non-statutory guidance.

I recognise too that these proposals come as trustees are dealing with the impact of the COVID-19 pandemic. However, this is also a time of opportunity - as we “build back better”, trustees must turn their minds to the transition to the low carbon economy. And we must ensure that pension scheme governance is as robust as possible to withstand the potential shocks that climate change and our response to it will bring.

Acting now to manage climate risks, and to take advantage of the opportunity of the low-carbon transition, will put schemes in a stronger position for the future. I believe that the proposals are proportionate, especially in light of the size and urgency of the threat – and the magnitude of the opportunities – posed to pension investments by climate change. I welcome trustees’ and all other stakeholders’ views and I ask that we all rise to the challenge.

Guy Opperman MP
Minister for Pensions and Financial Inclusion