Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021

Baroness Sherlock Excerpts

Monday 5th July 2021 Grand Committee

[Baroness Sherlock (Lab) [V]]

My Lords, I welcome this important instrument. I thank the Minister for her introduction and the other noble Lords for their contributions.

The Explanatory Memorandum notes the evidence suggesting

“that we are currently on track to see 3°C of warming by the end of the century.”

That level of warming would cause changes that fundamentally shift how the planet behaves, including the breakdown of the global ocean circulation system, rainforests turning to savannah, ice sheets disintegrating, the spread of deserts and the collapse of farmable land. This could result in mass migration, famine, war and death. It could not be more serious.

As the Minister reminded us, climate change is expected to have a significant impact on pension schemes and their almost £2 trillion in UK assets due to both the physical and transition risks. It is good that we are starting to see action taken within the industry, such as Aviva announcing that its auto-enrolment default funds will aim to achieve net zero by 2050—that is some £32 billion of capital—or the BT pension scheme setting a goal of net zero by 2035 for its whole portfolio of about £55 billion. There is lots of good practice emerging in public sector DB schemes.

With the climate emergency getting ever more serious, today’s action is long overdue, so it is good that the Pension Schemes Act from which this SI derives addresses climate risk. Pensions Minister Guy Opperman described the proposals as “world-leading”, and the Minister today noted that the UK is set to become the first major economy to require climate risks to be specifically considered and reported on—but I gently say to the Minister that the grandstanding is a little ungracious and that no reference was made to the fact that the Bill was made greener only by cross-party working in our House.

When the Pension Schemes Bill was introduced as a Lords starter, rather than net-zero provisions there were zero climate provisions in the legislation—a gaping hole we highlighted at Second Reading. The Government then introduced amendments in Committee but they had to be strengthened through cross-party negotiation, led by my noble friend Lady Jones of Whitchurch and the noble Baroness, Lady Hayman, to ensure that trustees and managers had to take account of the Paris Agreement and domestic targets such as net zero. As a result of that work, “climate change” was mentioned in domestic pensions legislation for the first time. We are really pleased with this achievement.

Turning to the detail of the instrument, I have a number of questions—the Minister would be disappointed if I did not, but none of them should be very unexpected, so I hope she will be ready and able to answer them. First, the Pensions Regulator will put requirements on trustees to drive change among investment managers. But the regulator has acknowledged that without standardised and enforced data throughout the investment supply chain, trustees would find it difficult to access the good-quality data they will need to produce the qualitative and quantitative outputs required by the new governance and reporting requirements.

There is an issue because the two regulators, TPR and the FCA, are not fully aligned in time, and TCFD disclosures aligned to the Task Force on Climate-related Financial Disclosures are not currently required throughout the investment chain. As my noble friend Lord Davies mentioned, the FCA is currently consulting on proposals to introduce climate-related financial disclosure rules and guidance for asset managers, life insurers, FCA-regulated pension providers and issuers of standard listed equity shares; to require firms to reveal how they will take climate-related risks into account in managing investments on behalf of clients; and to produce a baseline set of disclosures in respect of their products and portfolios. But the FCA proposals will not be released until 2022, so we do not know how they will align with the TPR requirements.

In his Mansion House speech on 1 July, Chancellor Rishi Sunak announced the sustainability disclosure requirements to be introduced for businesses and financial products. The Treasury has said that these are intended to bring together and streamline existing climate reporting requirements and that the Government will work with the FCA to create a new sustainable investment label—a quality stamp.

Here come two important questions on this issue. First, can the Minister clarify how these sustainability disclosure requirements will interact with the rules for trustees arising from these regulations on reporting on climate risk? Secondly, can trustees rely on an FCA quality stamp as a reliable and acceptable source of data for meeting their disclosure requirements under these regulations?

Next, a word about scope. The Minister mentioned that these new governance requirements will apply initially to trustees of schemes with relevant assets of £5 billion or more, then from October next year they will bring into scope trustees of schemes with relevant assets of £1 billion or more. TPR estimated that the first phase would capture 102 pension schemes, or roughly 42% of all UK pension assets. The second phase would capture an estimated 351 schemes. The provisions would then, by the end of phase 2, cover approximately 71% of all UK pensions assets.

Here comes the third question: what, if anything, will be done to manage climate risk for the other 29% of pension assets? Will there be any requirements on them at all, or any action in relation to them? Some respondents to the TPR consultation argued that the DWP should commit now to bringing more schemes into scope in 2024. I get that they want a review, but why did the Government reject that commitment in principle to bring more schemes in? Also, what support will be given to trustees to help them meet these new obligations?

I have two final quick questions. One is on cost. The annual net direct cost to business is suggested as £6.2 million—roughly £12,000 for a scheme in year 1 and about £10,800 thereafter. Is the intention to provide any transitional funding, or will the Government monitor these costs so that they can decide whether help is needed for smaller schemes when they are brought into scope? Finally, will there be a central collection and monitoring process to review information from all industry reports to get a broad picture of the progress that schemes are making?

These changes are very welcome, but we still have a long way to go to ensure that the pensions industry and the Government manage climate risk better and reach net zero by 2050. I congratulate all those who worked so hard to get this instrument before us today. I hope that the example of the pensions Bill, where cross-party pressure in this House led the Government to a better place, is one that will set a trend for the future. I look forward to the Minister’s reply.