COP26 opportunity for govt to show global leadership on pensions - WPC

The government should use the "major opportunity" of COP26 to show global leadership and work to build international consensus on the role of pension schemes in tackling climate change, according the Work and Pensions Committee (WPC).

Following its inquiry into stewardship, the WPC has called on the government to use COP26 to secure international commitments to work towards a global harmonisation of climate-related reporting standards, and recommended that the government’s green taxonomy align with international standards “as far as possible”.

It also suggested that the UK plays 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, having been the first country to mandate TCFD disclosures.

The importance of stewardship was also emphasised, with the committee recommending that government policy prioritises good pension scheme stewardship over divestment, as this is more likely to be an effective approach to help the real economy transition to net zero.

In line with this, it also recommended that the Department for Work and Pensions outlines the specific steps it is taking to ensure that its policies do not incentivise divestment over good stewardship, whilst still making clear that schemes could nevertheless consider divestment when there is no other option.

The committee also acknowledged, however, that there is a risk of a “green asset bubble” in the short term, with a limited number of suitable green assets available, therefore encouraging the government to continue to support the development of products, such as green gilts, to mitigate this.

In addition to the role of government, The Pensions Regulator was called upon to provide guidance on setting net-zero targets, and to report annually on the progress made in consolidating schemes, in light of the view that larger pension schemes are typically better placed to meet green investment costs.

Commenting on the report, WPC chair, Stephen Timms, 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.”

The UK Sustainable Investment and Finance Association (UKSIF) chief executive, James Alexander, has welcomed the committee's "timely report", having previously provided evidence to the inquiry earlier this year, where he highlighted COP26 as a "potential leadership opportunity for the UK".

Commenting on the report, Alexander said: “We are pleased to see many of UKSIF’s recommendations reflected in the final report.

"This crucially includes the necessity of the UK maximising its COP presidency to secure international agreement on greater harmonisation on climate reporting standards for schemes and other investors, and a call to government to ensure its policies incentivise good stewardship, which is a far more effective approach to making change in the real economy than divestment, which should be used as a last resort.”

However, whilst Make My Money Matter have backed the committee’s call to build consensus on the role of schemes in tackling climate change, it also called for more mandated progress given the urgency of climate change risks.

“But with the majority of pension schemes still failing to make robust net-zero commitments, time is running out, and we must act with greater urgency if we are to use our pension power to truly tackle the climate crisis," MMMM CEO, Tony Burdon, said.

“That’s why we’re calling on the government to mandate for all schemes to align to net zero at COP26 this year. That way, we can ensure our pensions take advantage of the green industrial revolution, while protecting savers from the ravages of global warming.”

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