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MPs call on government to force pension funds to declare climate change exposure


A House of Commons committee has concluded that the UK government should make it mandatory for large companies and asset owners such as pension funds to report their exposure to climate change risks and opportunities by 2022.

In its report on its inquiry into green finance, the Environmental Audit Committee said institutional investors such as pension funds were not considering environmental risks when making investment decisions.

The committee said the Financial Reporting Council's (FRC) Corporate Governance Code and UK Stewardship Code, and the Financial Conduct Authority's (FCA) listing rules should be amended to require climate-related financial disclosures on a comply or explain basis by 2022.

Failing appropriate implementation of climate risk reporting in these corporate governance and reporting frameworks, the MPs said the government should pass new sustainability reporting legislation.

It added that the government should issue immediate guidance making it clear that the Companies Act 2006 already requires companies to disclose climate change risks where they are financially material.

Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said the committee’s call for mandatory climate-risk reporting to include pension schemes “ups the ante for scheme trustees”.

“The need for trustees to understand and manage the potential long-term risks of climate change is not just a ‘nice to have’. It is key to ensuring proper governance around investments and compliance with trustees’ fiduciary duties,” Saunders said.

The committee’s report found structural incentives across the UK investment chain encourage a focus on short-term returns. As a result, investors were not considering longer-term issues such as environmental sustainability and climate change-related risks.

The MPs said the government should require fiduciaries to actively seek the views of their beneficiaries when producing Statements of Investment Principles and that pension savers needed to have more opportunities to engage over where their money is invested.

The committee also said climate risk should be taken into account for contract-based pension schemes. While the Pensions Regulator issued guidance in 2016 and 2017 for investment in occupational pension schemes, the FCA has not to date published similar guidance for contract-based schemes, which it regulates.

Several organisations giving evidence to the inquiry said there should be climate change-related guidance for trustees managing contract-based schemes and the report endorsed this approach.

“With climate risk being as relevant to investment performance in contract-based schemes as it is for occupational schemes, it is encouraging to see the committee urging more action and clarity in this area too,” Saunders said.

The Environmental Audit Committee’s recommendations tally with the recent findings of a report produced by Pinsent Masons and the University of Leeds. That publication clarified how trustees can, and should, consider climate change as part of their investment strategy in an appropriate and proportionate way, despite the lack of a coordinated approach on how these factors should be taken into account.

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