Committee secures pensions reform – but Government rejects mandatory climate risk reporting

01 November 2018

The Environmental Audit Committee (EAC) publishes the Government response to its report Greening Finance: Embedding sustainability in financial decision making.

The response shows that the Government and regulators have taken action on the committee’s recommendations to improve pension fund governance, but that Ministers have refused to make climate-related financial disclosures mandatory.

Chair's comments

Mary Creagh MP, Chair of the Environmental Audit Committee:

“Structural incentives across the investment chain encourage a short-term focus which tends to neglect longer-term considerations like sustainability. We are pleased that the Government and regulators are acting on our recommendations to improve how pension schemes factor climate change risks and opportunities into their decision making.

“It is disappointing that the Government has not used this opportunity to follow France in making it mandatory for large companies and asset owners to report their exposure to climate change risks and opportunities.”

The following EAC recommendations have been accepted:

  • The Government has agreed to clarify that trustees have a fiduciary duty to consider long term risk and opportunities, including environmental risks. It is now consulting on amendments to pension scheme regulations that would require trustees to set out how they take account of financially material risks and opportunities including climate change considerations.
  • The Government says it agrees that it is good practice for pension scheme trustees to inform the design of investment strategies with an understanding of their members. It has consulted on a proposed change to require trustees to set out how they will take account of the views of members in the development of investment policies. Defined contribution pension schemes would also have to publish their statement of investment principles and an annual implementation report describing how the investment policies have been applied, and inform members via their annual benefit statement of where it might be found.
  • The Financial Conduct Authority is consulting on rule changes that would require the Independent Governance Committees of contract-based pensions to report on how they manage environmental risks and how they take account of members’ ethical concerns.
  • The Financial Reporting Council has launched a new project to assess how well companies apply best practice identified by investors in reporting on climate change.

The Committee’s original report found that structural incentives across the UK investment chain encourage a focus on short-term returns, often to the neglect of longer-term considerations – including environmental sustainability and climate change-related risks and opportunities.

Confusion about the extent to which pension trustees have a duty to consider environmental risks have also prevented institutional investors addressing climate change risks. The EAC called on the Government to clarify in law that pension schemes have a duty to protect long-term value and should be considering environmental risks. It also recommended that the UK’s existing framework of financial law and governance could and should be used to make climate-related risk reporting mandatory.

Further information

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