Pension schemes 'can and must' support net-zero transition, says TPR

Pension schemes “can and must make a difference” in the transition to a net-zero economy, The Pensions Regulator (TPR) executive director of regulatory policy, analysis and advice, David Fairs, has said.

In a blog post, Fairs argued that a landscape of resilient pension schemes that protect savers from climate risk is “entirely within our reach”, emphasising that TPR wants "action, not just well-meaning intentions".

He pointed out that there is growing pressure for the pensions industry to play its part in the transition to net zero, including from campaign groups, such as Make My Money Matter, which has suggested that savers switching to a “greener” pension could do more to tackle climate change than driving an electric car or a vegan diet.

In light of this, he emphasised that there is still "a way to go", stating that "whether trustees think paying attention to climate-related risk and opportunities is the right thing to do or the prudent thing to do – they’re right."

"Climate change has the potential to be the biggest threat to the stability of the systems on which pension savers depend for access to their savings at the end of their working lives," he said. "But that doesn’t mean we are powerless in the face of that threat."

Fairs warned that climate change is a "systemic risk" posing financially material risks to sponsors of defined benefit (DB) schemes, to the value of funds and their investments, as well as a risk to economic stability and the long-term survival of the planet.

He said: "The way a scheme’s investments are stewarded, or looked after on behalf of savers, does have the potential to be powerful. Powerful in protecting, or even enhancing, savers’ retirement outcomes.

"Asset managers and companies may be closest to the flows of capital, but it is the responsibility of trustees to set the policy on how financially material considerations, such as climate change, are taken into account in the selection, retention and realisation of pension scheme investments.

"Even where trustees feel their advisers and asset managers are doing a satisfactory job considering climate-related risks and opportunities, the trustees have a duty to monitor whether their expectations are being met.

"Trustees should challenge asset managers and advisers to improve their processes where appropriate. Ultimately, if a scheme’s advisers do not sufficiently consider the risk and opportunities from climate change trustees can vote with their feet by re-tendering with mandated climate-related criteria or by appointing specialists."

Indeed, Fairs also cited recent research from XPS Pensions Group, which found that just 40 per cent of DB pension scheme trustees thought their schemes' ESG approach reflected their preferred approach, despite nearly all (95 per cent) agreeing on the importance of ESG investment principles.

Fairs said: “Applying pressure on investment managers to pay more attention to climate change in the building of portfolios and investment selection should drive those looking to attract investment to accelerate their plans to make their business more sustainable.

“Where trustees demand, supply should follow. A greater emphasis on stewardship, with clear goals for that work, should improve long-term value and minimise risk from factors such as climate change."

However, he clarified that this engagement "must be meaningful if it is to drive change", warning that trustees must be clearer with their investment managers than simply saying “do ESG stewardship for us” as this would not challenge the investment manager’s existing approach.

The comments were made amid TPR's ongoing consultation on climate guidance, with Fairs also confirming that the upcoming climate disclosure duties are expected to apply to schemes covering 81 per cent of memberships by the end of 2023.

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