Paris-aligned disclosure proposals welcomed despite data concerns

Industry experts have welcomed the government’s new climate-disclosure proposals and agreed that more needs to be done to tackle climate change, with analysis suggesting that the typical defined benefit (DB) scheme is currently aligned to a 3°C outcome.

The proposals, announced by Therese Coffey last week and currently under consultation, would require pension scheme trustees to calculate and disclose a portfolio alignment metric setting out the extent to which their investments are aligned with the 1.5°C Paris Agreement goal.

Analysis from Legal & General Investment Management (LGIM), however, showed that the typical DB scheme, based on the average allocation of the UK DB pensions market, is currently aligned to a 3°C outcome, around twice the government target.

“We have been encouraged by the number of schemes who are addressing the urgency of climate risk by starting on the pathway to decarbonisation; but it is clear that there is much more work to be done if the UK is to meet its 2050 commitments,” LGIM head of climate solutions, Nick Stansbury, commented.

Adding to this, LCP head of responsible investment, Claire Jones, highlighted the proposals as “a significant step-change in expectations on pension schemes to play their part in stewardship”.

She said: “For many at the moment, it’s a case of going through the motions, so the proposed guidance on stewardship reporting shows that the government is serious about raising standards for pension schemes in this area.

“Requiring trustees to measure and report on the alignment of their schemes’ assets with the Paris Agreement will provide a more rounded picture than just focusing on emissions alone.

“It will really help trustees understand and manage their scheme's exposure to climate-related risks and opportunities."

However, Jones warned that data will be a "big issue", suggesting that asset managers and others will need to get better at collecting and measuring the data, particularly in relation to private market assets.

These concerns were echoed by AJ Bell head of retirement policy, Tom Selby, who noted that whilst it makes “perfect sense” to use pensions legislation to push through change given the “significant investment heft of retirement funds”, this “will not be easy”.

He explained: “Devising reliable metrics on the environmental impact of stocks and funds is not an exact science, while trustees of pension schemes will continue to prioritise maximising long-term investment returns for members. Many would argue these aims can – and indeed should - go hand-in-hand.

“What’s more, just because climate reporting metrics are mandated, it doesn’t necessarily guarantee either a shift in investment focus or the broader member engagement needed to really push through meaningful behavioural change.

“Ultimately achieving the Paris goal requires a seismic shift in the way we as a society act, with improved disclosure representing just one piece of the puzzle.”

Indeed, whilst Make My Money Matter (MMMM) has applauded the new measures, it agreed that "reporting enough is not alone" and that the proposals “still do not go far enough”.

MMMM CEO, Tony Burdon, warned that waiting for voluntary commitments was also not proving sufficient, highlighting recent research from the group that found that 70 per cent of the UK's major pension schemes are yet to outline credible climate transition plans.

“That’s why we need government to take urgent action, and make net zero mandatory for all pension schemes," he said.

"In doing so the UK can lead the world on green finance, dramatically reduce our emissions, and protect savers investments from the worst ravages of climate change"

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