My Lords, I rise to move Amendment 28 in my name in this group and will speak to Amendment 92, to which I have added my name. I also support a number of the other amendments. The noble Lords who tabled them will obviously rise shortly to expound on their own aspects of this issue.
The main area this group deals with is the environmental impacts that pension funds can have. We have £1.3 trillion of pension assets; they can help tackle climate change. Our country will host the COP
26 in December, at which we will have the opportunity to show world leadership in our thinking on climate change and policies to address these issues.
Climate change, as most of us believe, poses a potentially material risk to pensions and financial assets. The insurer Aviva estimates that investors could lose £2.7 trillion from investment value globally due to climate change. I am delighted that the Government have tabled amendments giving Ministers a power to require pension schemes to disclose how they manage climate-related financial risks in line with the more detailed, granular requirements of the Task Force on Climate-related Financial Disclosures.
I support those amendments, but the Government have said that they will require only large schemes to report in line with the TCFD disclosure requirements. They have not said what “large” means, but I assume it will probably not include schemes with fewer than 5,000 members, for example. These smaller schemes still need to manage the risks to savers’ pensions potentially posed by climate change. Amendment 28 is therefore calling for the Pensions Regulator to create a compliance framework based on a public register of schemes and ESG—environmental, social and governance —investment policies.
In October 2018, the Government changed the law to require UK pension scheme trustees to prepare a policy on how they manage the financially material risks arising from issues such as climate change. Trustees are required to state these policies in their statement of investment principles, a statutorily mandated document which all schemes are required to have. Trustees should have updated these statements by 1 October 2019. Some schemes were required to publish them at that point.
However, the UK Sustainable Investment and Finance Association has reviewed—with the help of the Pensions Regulator—the policies of a representative sample of these UK trust-based pensions. For those schemes, representing 3 million or so savers, its report found clear evidence that “large scale non-compliance” with this requirement exists and that trustees had not been publishing their statement of investment principles. Two-thirds of the schemes in its sample had not published, and of those which had the policies were pretty thin and noncommittal.
It is not exactly clear why trustees are failing to disclose and comply with this new law. The UK Sustainable Investment and Finance Association has suggested that it may be because smaller schemes—schemes with fewer than 5,000 members, let us say—do not have a website, so the administrative burden of publishing these statements and complying with the law has proved overly taxing for them. There has therefore been a recommendation that the Pensions Regulator should be given a duty to obtain these statements of investment principles and publish them on its own website in a central registry. Amendment 28 seeks to insert this into the Bill.
If the Pensions Regulator has the power to obtain and publish these statements of investment principles, it will obviously be able to remove the administrative burden from the schemes. It will also give the regulator a much better ability to monitor compliance with these requirements. It will improve the transparency
and scrutiny of the schemes’ policies to manage these environmental, social and governance risks, as well as providing the industry with a resource to find out about and share best practice. Importantly, it would allow scheme members to see their own schemes’ investment policies. These are the reasons why I urge the Minister to consider whether we might be able to insert this provision into the Bill.
The notion of a public register of these statements of investment principles and implementation statements could be a powerful way to drive up trustee awareness of action on the risks arising from climate change. It would allow monitoring and scrutiny of what these schemes currently do better to educate those which may not be compliant—some of these laggards, perhaps —about what the leading trustees and schemes are doing. Campaign groups could scrutinise this. Ministers could also scrutinise and report on the issues that are so important and potentially powerful in allowing our country to be a leader in this field, given the size of our pension assets. They dwarf those of most other countries, particularly in Europe. It could help to fill an important hole in the Government’s overall climate change strategy.
The Government are of course right to mandate that the large schemes are going to do this. As I say, I support the government amendments, but we should also bear in mind that this is a question of protecting all pension savers’ money—not just in the large schemes but in all schemes—from the risk of climate change. Therefore to expose workers in small companies or small schemes to more financial risks from climate change does not seem an effective way forward. We have an opportunity in the Bill to make a real difference. There is scope to help the pensions industry be better able to address the financial risks of climate change and to be better aligned with the interests of savers, who will increasingly be concerned about these issues. This is an opportunity to put our pension funds and pension industry on a more sustainable footing and, if noble Lords will forgive this play on words, it can also include sustainable investments in relation to climate and environmental sustainability.
I have added my name to Amendment 92 in the name of the Baroness, Lady Hayman, and I support Amendments 75 and 89, which talk about requiring schemes to align their portfolios with the Paris agreement objectives. The UK Government need to ensure that pension investment portfolios are aligned with, for example, the UK’s emission reduction targets. Pension funds also need to act to protect their beneficiaries’ savings from these financial risks. For example, research from the leading consultancy Mercer has found that for nearly all asset classes, regions and timeframes, a 2 degree increase in global temperature scenario would lead to much better projected returns than if there was a 3 or 4 degree increase in global temperatures. The requirements in these amendments would not necessarily involve disinvestment from any particular sector; it does not direct how the trustees must invest. It would involve trustees in assessing whether their assets in their portfolios have a clear strategy for, for example, aligning their business model with the UK emissions reduction timeline and taking appropriate action. That
would also give the companies clear incentives to develop Paris-compliant business models and invest in low-carbon opportunities, making it much easier for the Government to achieve their own targets.
Amendment 92, in the name of the noble Baroness, Lady Hayman, would help to facilitate this by requiring pension schemes to report against the Task Force on Climate-related Financial Disclosures framework. The amendment would ensure that all pension schemes have to report against the same frameworks, so there is commonality here, and, as I say, it does not dictate that schemes have to pursue a particular investment or disinvestment strategy. It would be left to the trustees. Operational independence, which is, of course, an important part of our system for trustees, is maintained. However, the requirement to disclose how the trustees are mitigating climate risk should also help to drive up standards of trusteeship, as well as protecting these assets and enhancing the UK’s global role in tackling climate change and other related issues.
I beg to move, and I look forward to the debate, other noble Lords’ contributions and the Minister’s response.