Government must seize COP26 opportunity to build consensus on role of pension schemes in tackling climate change, MPs say

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UK should use November’s Glasgow conference to secure international commitments on global harmonisation of climate-related financial disclosures

The Work and Pensions Committee calls on the Government to show global leadership on pensions and climate change ahead of the UN conference in Glasgow this November. In a report published today, the Committee makes recommendations on reporting standards, pension scheme governance and investment and stewardship.

Harmonising climate-related reporting standards would considerably reduce the burden and costs to pension schemes given the global nature of assets and investments, the report says, but the Committee adds that work towards this must not be a barrier to the UK rapidly implementing its own high standards.

Government policy must prioritise good pension scheme stewardship over divestment

On investment and stewardship, the Committee welcomes the Government’s stance that divestment – the process of selling assets already held – to reduce pension schemes’ contribution to climate change should be a last resort. Encouraging behavioural change in companies through good stewardship is more likely to be an effective approach to help the real economy transition to net zero, the report concludes.

Chair's comment

Rt Hon Stephen Timms MP, Chair of the Work and Pensions Committee, said:

“The challenges of climate change can be met only by countries coming together. With pension investments unrestrained by borders, international agreement is going to be key if the potential for pension schemes to contribute to cutting carbon emissions is to be realised. Hosting COP26 provides the UK with a unique opportunity to build an international consensus on reporting standards and stewardship and the Government must seize it with both hands.

While taking a lead on pushing for the global harmonisation of climate-related reporting requirements, the UK must not let up in implementing high standards of reporting and disclosures domestically.

Pension schemes can play a major role in helping the real economy transition to net zero but encouraging companies to become more sustainable through good and effective stewardship should always be the first step before moves to sell off assets that are unable to reduce their contribution to climate change. The Government needs to ensure that its policies do not incentivise divestment over good stewardship of schemes.”

Main findings and recommendations

Reporting standards

• The Government should use COP26 to try to secure international commitments to work towards the global harmonisation of climate-related reporting standards.
• The UK should play an active role in encouraging and facilitating other economies to require pension scheme trustees to fully consider and disclose their climate-related financial risks and opportunities (as set out in the Pension Schemes Act 2021).
• The Government’s planned green taxonomy – a common framework for determining which activities of firms and investments can be defined as environmentally sustainable – will be vital in tackling climate change. It should align with international standards as far as possible.

Scheme governance

• Larger pension schemes are usually better placed to meet the costs of making green investments. The Pensions Regulator should report annually on the progress made in consolidating schemes.
• The Committee encourages schemes to consider setting net zero targets and recommends that the Pensions Regulator should provide guidance.

Investment and stewardship

• With a limited number of suitable green assets available for pension schemes to invest in, there is a risk of a ‘green asset bubble’ in the short term. The Government should continue to support the development of products, such as green gilts, to mitigate the risk.
• The Government should set out a UK climate roadmap to provide greater certainty for pension schemes and other investors, particularly for those investing in long-term investments such as infrastructure.
• Divestment – where assets already held by a pension scheme are sold – should only ever be a last resort where assets are unable to reduce their contribution to climate change. Encouraging behaviour change in companies through good stewardship is more likely to be an effective approach to help the real economy transition to net zero.
• The DWP should set out what specific steps it is taking to ensure that its policies do not incentivise divestment over good stewardship—while making clear that schemes could nevertheless consider divestment when there is no other option.

Further information

• Inquiry: Pension stewardship and COP26
• Work and Pensions Committee
• About Parliament: Select committees
• Visiting Parliament: Watch committees

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