My Lords, government Amendments 75, 76, 77 and 78 seek to amend new Sections 41A and 41B of the Pensions Act 1995, which are to be inserted by Clause 124, introduced by the Government in Committee. The amendments would allow regulations to require that the trustees and managers of occupational pension schemes explicitly consider climate change goals, including the Paris Agreement temperature goal, for the purpose of ensuring the effective governance of their schemes with respect to the effects of climate change. The UK Government and others are committed to the Paris Agreement’s goal of holding the increase in the average global temperature to well below 2 degrees above pre-industrial levels. In fact, the UK is leading the way globally and has committed in law to the target of net-zero greenhouse gas emissions by 2050. We are completely committed to that.
The Covid-19 emergency has triggered the devaluation of many assets across the globe, affecting many investors. Climate change has the potential to bring about a greater, more permanent devaluation that pension schemes need to be prepared for. The Government intend to deliver a recovery from the current Covid-19 emergency that results in an economy that is more sustainable and resilient. Tackling climate change will be a win-win, as many of the actions we need to take to reach our UK climate targets, net zero included, will also support our economy as we emerge from the Covid-19 emergency. The ultimate achievement of the Paris Agreement goal and other climate goals, along with the steps taken by the Government and others to achieve them, are now of greater importance for pension schemes to consider in their overall governance of risk. These amendments would enable regulations to require that scheme trustees and managers take climate change goals and the steps taken to meet them into account.
Amendment 75 makes a minor change to subsection (4) of new Section 41A to make explicit provision for two types of assessments that may be required under subsection (3)(b). Amendment 76 inserts new subsections (4)(a) and (4)(b) into Section 41A. Subsection (4)(a) makes explicit that regulations may require scheme trustees and managers to take into account the different ways in which the climate might change and the steps that might be taken because of those changes. This allows for the assessment of physical and transitional risks respectively—the typical description of risk used by industry. Subsection (4)(b) provides that regulations made under subsection (4)(a) may require trustees and managers to adopt prescribed assumptions about achievement of the Paris Agreement goal and other climate change goals, or the steps that may be taken to achieve them.
The third amendment, Amendment 77, defines the meaning of “the Paris Agreement goal” by specific reference to Article 2.1a of the Paris Agreement. I would like to assure the noble Baroness, Lady Hayman, that Amendment 78 does not limit publication to the effects of climate but includes the effects of assets that contribute to climate change. Pension schemes already have a fiduciary duty to steward their assets, and all schemes have a duty to report on their stewardship policy, including engagement and voting, while from October of this year they will be required to report on how they have implemented their policies.
Finally, Amendment 78 to Section 41B would ensure that trustees and managers may be required to publish information relating to the assessments they make by reference to the Paris Agreement goal or other climate change goals under Section 41A. This includes publication of the contribution of schemes’ assets to climate change referred to in Section 41A(4)(b) as a way of measuring the extent of Paris alignment. Amendments 85 to 88 make corresponding changes to paragraph 12 of Schedule 11 for Northern Ireland.
I turn to Amendment 80. We believe that it is inappropriate to limit the scope of the legislation in this way. I should like to talk about the points made by my noble friend Lord Balfe about smaller schemes. I have been given assurances about such schemes and I can also reassure my noble friend that none of these measures would prevent pension scheme trustees investing in index trackers or seeking to drive schemes towards higher-cost active management. Innovation in the market has led to a blossoming of index-tracking products that take account of climate change risk in different ways. If the trustees of schemes of any size wish to take advantage of these, they can. Members of occupational schemes rarely have a choice of where they save, and they have a right to benefit from the effective governance and reporting of climate change risk, regardless of their employer’s chosen scheme. However, I can reassure my noble friend that these measures are intended to protect benefits through better consideration and management of climate risk.
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It is not the Government’s intention to impose needless burdens on schemes. I have already indicated our intention to begin with large schemes and then consider costs and benefits carefully before we extend any requirements to smaller schemes. This also aligns with the direction of travel of the United Nations Principles for Responsible Investment initiative, referred to in the amendment, which already requires signatories to carry out some TCFD-based reporting and has recently consulted on extending reporting requirements.
In relation to Amendment 34, which applies only to collective money purchase schemes, the Government have already legislated to require schemes with 100 or more members to have a policy on financially material considerations, including environmental, social and governance considerations. Schemes offering money purchase benefits will already be required to report annually on how they have followed these policies from October 2020. The Government announced during Committee their intention that collective money purchase schemes will be subject to the same requirements on environmental, social and governance factors, including climate change, as other defined contribution schemes.
On Amendments 72 and 74, the Government have been absolutely clear on a number of occasions, including before the House, that we will be making regulations in this area. The Government produced amendments at speed to introduce this important policy into the Bill in time for consideration in Committee. The reason why Clause 124 exists at all is that the Government wish to take action with regulations to require schemes to have effective governance of climate change.
The noble Lord, Lord Sharkey, raised the issue of changing “may” to “must”, which has been the subject of much discussion in our various meetings. Our position is that such a change is unnecessary and would have no impact on the Government’s course of action.
Finally, I turn to Amendments 73 and 79 in the names of the noble Baronesses, Lady Hayman, Lady Jones and Lady Bennett. I confirm that the government amendments go further than their amendments and achieve the intended clarification of the policy much more effectively. First, the government amendments do not restrict consideration of climate change goals to international treaties to which the UK is a signatory. They will also enable goals set domestically by the UK, including the commitment to net-zero greenhouse gas emissions by 2050, to be taken into account. Secondly, I draw attention to subsection (4B)(a) in the Government’s amendments. While Amendments 73 and 79 seek to require consideration of the Paris Agreement, the Government’s amendments go further and would enable us to require consideration of steps taken towards achieving that temperature goal. This will ensure that the schemes can be asked to consider the likely effects of transition to a low-carbon economy, not just the final-outcome achievement of the Paris goal.
Finally, these amendments require consideration of the entire UN framework convention on climate change in addition to the Paris Agreement, which was adopted under it. This would include treaty objectives that are not relevant to the operation of a pension scheme. Rather, it is the temperature goal of the Paris Agreement, and the steps that Governments and others take as a result, that are of key importance for pension schemes to consider. Our amendments deliver that.
I thank the noble Baroness, Lady Bennett, for reminding us about the social development goals and the importance of climate emergency impacts as well as social impact, which I think is very important. She talked about focusing on the economic recovery from the emergency. The Government’s view is that the economic recovery and our continued commitment to the climate goals are not mutually exclusive. We have grown our economy by 75% while cutting emissions by over 43% over the past three decades. As the economy recovers, not only can schemes continue to take advantage of green investment opportunities that align with the achievement of the Paris agreement goal, but they should—as is the focus of this amendment —protect members against the risks of climate change.
The noble Baroness, Lady Bennett, asked why measures applied in Northern Ireland. Paragraph 12 of Schedule 11 makes provision for Northern Ireland that is equivalent to the provision made for Great Britain by Clause 124. This will ensure that, in accordance with the long-standing principle of parity, the single system of pensions across the UK is maintained, as such agreements made in relation to the proposed amendments to Clause 124 apply equally to the amendments proposed to paragraph 12 of Schedule 11.
The noble Baroness, Lady Hayman, gave me lots of homework, and I hope I am going to get 10 out of 10 for this. She raised the matter of pensions schemes being required to take into account not just the risks
outlined in new Section 41A(2)(a) but all climate risks, including those that are systemic, both financial and transitional. The risk referred to in new subsection (2)(a) is not intended to be an exhaustive list; it merely makes clear that risks arising from the effects of climate change include those arising from steps taken because of it. We acknowledge the systemic risk of climate change to industries, national economies and financial markets. Subject of course to consultation, we intend to make provision in regulations for scheme trustees to consider all relevant risks arising from the effects of climate change. Indeed, new Section 41A(3) refers to
“risks of a prescribed description”
for precisely this reason. The Government are minded, subject to consultation, to prescribe the whole range of risks cited in the TCFD’s recommendations as those which asset owners should consider.
The noble Baroness, Lady Hayman, also talked about the amendment which brings Article 2.1a into the Bill, but Article 2.1c is also relevant to the pension scheme. The Government consider that Article 2.1a is of primary relevance to pensions schemes and there is an understanding of what taking it into account would mean for trustees and managers. However, our amendments make it clear that regulations may require scheme trustees and managers to take account of other climate change goals as part of ensuring effective scheme governance. This could include the goal in Article 2.1c. The amendments will allow the Government to make regulations that ensure that the whole system of pension saving and investment effectively takes into account a future low-emissions world.
The noble Baroness, Lady Jones, asked me to clarify the Pensions Regulator’s plans to ensure that pension schemes are not paying lip service to ESG requirements. The chief executive of the Pensions Regulator has written to the DWP to confirm that it is taking action. It will follow up on breaches of compliance.
The noble Baroness, Lady Ritchie, asked why Northern Ireland was included in the Bill. Although pensions are a devolved matter, this is an area where Northern Ireland has long maintained parity with Great Britain. There is in effect a single system of pensions across the UK with many pension schemes and, indeed, the regulator, the Pensions Ombudsman, the Pension Protection Fund et cetera operating on a UK-wide basis. Devolved government in Northern Ireland has now been restored. On 1 June, the Northern Ireland Assembly approved the legislative consent Motion on the Bill as introduced. A further legislative consent Motion will be necessary to cover amendments to the Bill which the Northern Ireland Minister for Communities has agreed should extend to Northern Ireland. The process for an additional legislative consent Motion is a shortened procedure and we look forward to receiving the Assembly’s further consent in due course.
The noble Baroness, Lady Ritchie, asked a number of questions about further correspondence and, if I may, I will write to her.
I thank my noble friend Lord Eccles for his many pertinent and well-made points.
The Paris Agreement is clearly central to how we as a nation and a global economy tackle climate change. The Government have been clear on a number of
occasions that pension schemes have their part to play. These amendments help to clarify the part that the Government expect them to play, to take account of progress towards the achievement of the Paris and other climate goals in measuring, monitoring and managing the risks and opportunities for their members’ benefits and to publish how they have done so. Even in the current period of uncertainty, tackling climate change must remain the top priority. The Government’s amendments and the associated powers remain as urgent as they are important. I hope that, in the light of the explanations I have provided, noble Lords will not move their amendments.