Pension Schemes Bill

Lord Sharkey Excerpts

Monday 23rd February 2026 Grand Committee

Moved by

[Lord Sharkey]

212: After Clause 117, insert the following new Clause—
“Fossil fuels and climate change risk(1) The Pensions Act 1995 is amended as follows.(2) In section 41A (climate change risk), after subsection (6) insert—“(6A) Regulations under subsection (1) must, within 1 year of the Pension Schemes Act 2026 receiving Royal Assent, prohibit the trustees or managers of schemes of a prescribed description from holding relevant assets.(6B) The relevant assets in subsection (6A) are issuance by issuers which, in relation to thermal coal—(a) derive 10% or more of annual revenue from its production, transport or combustion,(b) produce annually 10 million tonnes or more, or(c) have 5GW or more of power generation capacity.(6C) Within 2 years of the Pensions Act 2026 receiving Royal Assent, and every 3 years thereafter, the Secretary of State must carry out and publish a review on whether the definition of relevant assets should be extended to include—(a) issuance by issuers which, in relation to thermal coal, derive a smaller proportion of revenue, produce a smaller amount or have a smaller amount of power generation capacity than the proportion and amounts specified in (6B),(b) some or all new issuance by issuers of a prescribed description deriving a prescribed proportion or amount of their revenue from the extraction, transport, trading or combustion of prescribed fossil fuels, or(c) some or all new or existing issuance by issuers of a prescribed description investing a prescribed proportion or amount in exploring for, or expanding the extraction of, prescribed fossil fuels. (6D) Regulations under subsection (1) may implement the conclusions of the review referred to in (6C).”(3) In subsection (8), at end insert—““thermal coal” means coal and lignite used in the generation of electricity and in providing heat for industrial or residential purposes;“issuance” means all investable assets, including equity and debt.”(4) The Financial Conduct Authority must make general rules with effects corresponding to the provisions of subsection (1) for providers of pension schemes to which Part 7A of the Financial Services and Markets Act 2000 (inserted by section 48 of this Act) applies.(5) The Secretary of State must make regulations with effects corresponding to the provisions of subsection (1) for scheme managers of the Local Government Pension Scheme.(6) The rules and regulations under subsections (4) and (5) must come into force no later than the date on which regulations pursuant to section 41A(6A) of the Pensions Act 1995 (as amended by this Act) come into force.”Member’s explanatory statement
This new clause would require Government and the FCA to make regulations and rules on climate risk grounds restricting exposure of some occupational and workplace personal schemes to thermal coal investments and to regularly review whether the restrictions should be extended to other fossil fuel investments.

[Lord Sharkey (LD)]

My Lords, Amendment 212 is in my name and those of the noble Baronesses, Lady Hayman, Lady Griffin of Princethorpe and Lady Bennett of Manor Castle. I thank them for their support and look forward to their contributions. I also thank the Better Pensions Coalition for its input and advice—I should probably say “guidance” rather than “advice”, since no money changed hands.

This amendment has a simple purpose: it seeks to restrict pension investments in companies that undertake certain significant levels of climate-damaging activity Specifically, it would require the Government to legislate to exclude firms with high thermal coal exposure from pension scheme portfolios within one year of Royal Assent. It would require regular reviews on whether to extend the exclusion, and would permit the Government to legislate to implement the outcomes of those reviews. The amendment sets out to do this by amending Section 41A of the Pensions Act 1995, which was inserted by Section 124 of the Pension Schemes Act 2021 under the previous Conservative Administration.

Section 41A allows the imposition of regulation on trustees of pension funds in order to secure

“effective governance of the scheme with respect to the effects of climate change”.

The location of this clause means that all exclusions must be legislated for on climate-risk grounds, not on ethical grounds or approval or disapproval of certain investments. That is why the primary focus of our amendment is the risk to savers’ retirements generated by climate change. It is the case that savers are at risk, not just from fossil fuel assets that have become stranded as the cost of low-carbon energy falls, but from their pension schemes’ investments in fossil fuels funding increased global emissions, contributing to runaway climate change, which would damage returns and the value of their other investments.

There are no safe-haven assets that will be immune from the 2.6 degrees centigrade global warming we are currently steering towards. The Institute and Faculty of Actuaries has assessed that the current suite of global climate policies could shrink the global economy to half its current size. Alltech finance research indicates that UK pension portfolios could face valuation declines of between 25% and 50% under plausible climate scenarios. Pension savers risk a much more expensive retirement and poor quality of life from continued fossil use. The cost of housing, energy and food is likely to be much higher, partly because their pensions have funded dangerous levels of climate change.

The amendment starts with thermal coal, the most damaging and least necessary fossil fuel. Here in the UK, of course, we ended the use of coal on the power grid in 2024, but despite that, UK pension funds risk undermining this progress by funding the continuous expansion of coal overseas. New research recently published by Finance Innovation Lab has found that pension schemes hold around £10 billion in thermal coal and that this could be responsible for around 17 million tonnes of greenhouse gases each year. Ironically, that is the same as the entire reduction in emissions from the UK power network under successive Conservative and Labour Administrations between 2019 and 2025. In other words, the UK’s main climate policy achievement at home, replacing coal-fired power with clean energy, may have been cancelled out by pension scheme investments in coal overseas, using contributions from savers, employers and taxpayers.

Pension schemes also continue to hold many more billions, around £88 billion at the last estimate, in fossil fuel companies as a whole, including those involved in new coal and gas and oil exploration. This has some of the characteristics of a collective action problem. The International Energy Agency has warned that there is no scope for additional fossil fuel production if the world is to stay within safe climate limits. Schemes fear missing out on short-term returns that other schemes may be generating, so each scheme staying invested and funding further oil, gas and, especially, coal investment is jeopardising long-term returns for themselves and for everybody else.

The UK pension sector is the largest in Europe. It has the potential to move markets, hasten the global exit from coal and, in due course, to do the same thing for oil and gas expansion. I make it clear that our proposed amendment does not sacrifice member returns. Any decisions to require exclusion must be made on climate risk grounds in accordance with the provisions of Section 41A of the Pensions Act 1995, not on the basis of ethical or political objections, as I said. The amendment cannot be used by the Government to mandate or forbid other types of investment because only the investments set out clearly in proposed new subsections (6B) and (6C) are in scope. Any attempt by the Government to use our amendment to exclude a wider range of investments without demonstration of the climate risk would be unlawful. I should also mention at this point that steelmaking would be unaffected by our amendment: the ban would be limited to thermal coal. Over time, we will need to phase out coking coal as well, but this can take place when it can be done without disrupting the sector.

We have seen in our discussions in Committee that the Government would like to have a reserve power to mandate pension investment into private markets for member returns and wider economic benefits. For Peers who are opposed to the principle of mandation, as I am, I reassure noble Lords that the power to exclude contained in our amendment is very tightly constrained. It would permit a direction to exclude only on climate risk grounds, in accordance with the terms of Section 41A. The Government, as we have seen, are proposing a reserve power to allow direction on almost any grounds, as long as they produce a report first. Our amendment is limited to coal and other fossil fuels. The Government’s reserve power allows the direction of investment into any sector, jurisdiction or asset class, as long as it is not listed.

The Government may claim that the consolidation proposed in the Bill will help reduce investment in fossil fuels, but that seems unlikely on the basis of current behaviour. Industry research due to be published next month by Corporate Adviser Intelligence will show that seven of the largest 19 schemes used for automatic enrolment—including household names such as Aviva, Royal London and Scottish Widows—remain invested, via their default fund, in one or more of thermal coal, tar sands and Arctic drilling.

Transition plans also do not look likely to address our concerns. Labour’s manifesto proposed that schemes should be required to produce and implement Paris Agreement-aligned transition plans but, 18 months on, there does not appear to be a decision on whether to proceed with that. As I understand it, there is slated to be a consultation on policy detail in 2026 and there may be regulations in 2027, with plans perhaps to be produced in 2028—so probably no action before the next general election. But the Government have made strong commitments, both at COP and in their own targets, with the aim of an effective 40% reduction in greenhouse gas emissions between 2020 and 2030. Transition plans will be great for the 2030s and 2040s, but those plans can be built only on the emissions reductions that we achieve in this decade.

We need faster action to be able to achieve our targets. Our amendment will deliver some of that, and I beg to move.

[Baroness Hayman (CB)]

My Lords, I declare my interests as a director of Peers for the Planet and a previous chair of that organisation. In this group of amendments, we address long-term systemic risks and how pension schemes both assess and manage them. All three of the amendments that we are discussing recognise that it is pension savers who will pay the heaviest price if the financially material risks to their savings and standards of living posed by climate change and biodiversity loss are not properly accounted for.

I have added my name to Amendment 212, which was just introduced so cogently by the noble Lord, Lord Sharkey. It is important because, as he said, UK pension schemes and savers remain overexposed to the risks of stranded assets from fossil fuels—in particular, coal. New research by the Finance Innovation Lab suggests that UK pension funds have at least £10.5 billion invested in companies that are extracting or burning coal, which could pose significant risks to pension savers. To date, pension schemes have not been required to take mitigating actions, so the sector has not moved quickly enough or at the scale needed to insulate savers from the emerging market and physical risks linked to those very carbon-intensive investments.

I also welcome the constructive intentions behind Amendment 218E in the name of the noble Baroness, Lady Coffey, and I look forward to hearing her speaking on it later. This amendment seeks to solve a major blind spot in the pension system by equipping trustees with the tools to understand how nature loss may affect asset values, as well as how global efforts to restore nature may reshape markets.

I now turn to my cross-party amendment, Amendment 218A. I thank the noble Lord, Lord Sharkey, and the noble Baronesses, Lady Penn and Lady Griffin of Princethorpe, for their support in adding their names. I am grateful to the Minister and her officials for a useful and interesting meeting ahead of today’s debate, although I hope that she may be a little more optimistic in her response to my amendment today. I am also grateful for the briefings I have received from UKSIF, Unison and ShareAction, and I pay tribute to the Financial Markets Law Committee for both its work on fiduciary duty and its extremely valuable 2024 report.

That report highlighted the way in which the gap left in legislation relating to fiduciary duty causes confusion and uncertainty and can result in trustees interpreting duties in overly narrow ways. I do not want to repeat my Second Reading speech, but there is now a widespread acceptance that the current lack of clarity around fiduciary duty is a real problem for pension scheme trustees—for example, in how trustees balance maximising short-term returns, potentially at the expense of considering other material factors over the longer term, which can have real-world implications for members’ interests further down the line. Even the Treasury, in its recently updated Green Book, recommends that the business case for proposals with a lifetime beyond 2040 should now be appraised against warming scenarios of both two degrees and four degrees centigrade, a possibility under which scientists say that the risks to economic growth and financial stability go up and into uncharted territory.

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[Baroness Sherlock (Lab)]

My Lords, I am very grateful to the noble Baronesses, Lady Hayman and Lady Coffey, and the noble Lord, Lord Sharkey, for introducing their amendments, and all noble Lords for contributing to a very interesting discussion. I will start with Amendment 212 from the noble Lord, Lord Sharkey.

While I recognise the aim behind this amendment, the Government believe that decisions about whether to invest, divest or engage must rest with trustees, who are already legally required to invest in the best financial interests of their members and to consider climate-related risks as part of that duty.

[Lord Sharkey (LD)]

My Lords—

[Baroness Sherlock (Lab)]

I cannot get two sentences in before I am interrupted.

[Lord Sharkey (LD)]

I am sorry, it will not happen again, but the Government are trying to do precisely what the Minister said they should not do: they are trying to mandate investments.

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[Baroness Sherlock (Lab)]

Let me explain. We are concerned that replicating the climate provisions of Sections 41A to 41C of the biodiversity Act 1995 on a separate statutory track risks creating overlapping or potentially inconsistent strategies, metrics, scenarios and governance. Trustees could find themselves operating parallel regimes that could cut across one another, generating unnecessary process burden without necessarily improving outcomes for savers.

Crucially, there is also a sequencing issue. Although the evidence base on nature-related financial risk is advancing rapidly, nature data remain less mature than climate data, and the international baseline is still being established. Last November, the ISSB announced the beginning of nature-related standard setting, with the intention that these will become the global baseline. More than 30 jurisdictions worldwide have already adopted, or are preparing to adopt, these sustainability standards. Introducing a UK-specific statutory duty ahead of those developments would risk locking schemes into a domestic framework that could quickly be superseded internationally.

As I noted in our earlier discussion on Amendment 212, the Government are progressing their commitment to credible transition plans, beginning with companies. We believe that it would be premature to legislate for a separate, pension-specific biodiversity regime in advance of those cross-economy frameworks and the ISSB’s nature baseline. Our approach is to sequence reforms so that pension disclosures plug into a consistent, interoperable flow of corporate information, rather than obliging trustees to build bespoke and potentially temporary architecture. As part of our forthcoming statutory guidance on trustee investment duties, we will consider including concrete, good-practice examples of how schemes can identify, assess and manage biodiversity and broader nature-related risks, including supply chain deforestation, nature dependency mapping, data sources and stewardship escalation, as well as how to treat nature-related impacts where they are financially material.

The Government’s role is to enable and accelerate this momentum with coherent, internationally aligned frameworks; it is not to create parallel statutory silos. For these reasons, although we fully share in the intent behind Amendment 218E—I acknowledge the work done by the noble Baroness, Lady Coffey—we do not believe that this approach is correct. This has been a very good debate but I hope that, in the light of my remarks, noble Lords will feel able to withdraw or not press their amendments.

[Lord Sharkey (LD)]

The fact is that some, though not all, pension funds are invested in climate-changing activities. We need to do something about that, and we need to do it soon.

The other point I ought to pick up is, again, to do with statutory guidance. I have frequently asked when we will see the guidance, but the only thing I know for certain is that it will not be before this Bill becomes law. Parliament seems to be being bypassed in all this—and in all the secondary legislation that will be necessary to make this mean anything at all. It is reasonable for guidance to explain how pension schemes should go about considering certain matters, but it is not reasonable for what those matters are to go unscrutinised by Parliament and to be changeable at the whim of a Minister. Parliament will be unable to hold the Government to account. Why is it that, in the face of such concerns about guidance and fiduciary duty, as well as the obvious inherent dangers to the proper exercise of fiduciary duty, the Government choose to exclude Parliament?

I beg leave to withdraw my amendment.

Amendment 212 withdrawn.