UK pensions funds required to factor in climate change risk

Occupational pension scheme trustees will be required to consider the financial risks posed by climate change

UK pension funds may soon be required by law to report on the risks climate change could have on their members' investments, becoming the first major economy to do so.

Speaking last week, the UK's work and pensions secretary Therese Coffey proposed legislation that would require occupational pension scheme trustees to consider the long-term financial risks posed by climate change.

The government wants to see the 100 largest occupational pension schemes - those with £5 billion or more in assets, and all authorised master trusts - to publish and produce climate risk disclosures by the end of 2022. For all those with at least £1 billion in assets would have until 2023 to meet the requirements.

If all goes according to plan, by the end of 2023 the reporting will have captured more than 70% of assets under management, and over 80% of members.

In the UK, pension institutions control some £1.8 trillion of investments. Pension scheme trustees are entrusted with our savings and finances for retirement - investments that bear fruit in 10, 20, 30, 40 years' time, Coffey said. So it is only right that they take into account the long-term financial risks and they are also in the ideal position to benefit from that change to a sustainable, low-carbon economy.

Coffey said that any pension scheme that has not yet designed or implemented a plan for transition is risking its future and that of its members.

Schemes of all sizes need to be acting right now for the financial risks and opportunities climate change presents, providing sustainable returns that will keep many pensioners comfortable in their retirement, she said.

The requirements would be extended to smaller schemes down the line, following further consultation.

The requirements do not apply to personal or public sector funds, with Coffey saying it is up to other regulators to decide whether or not to follow suit.

But I think it is right that long-term investors, such as trustees, take action to address these risks and protect the retirement savings of hard-working people, she added.

Acknowledging that some may say complete divestment is the better option, Coffey said such an approach is overly simplistic and actually makes it harder to achieve net zero.

Pension schemes need to act in their members' best interests, not take moral stances on their members' behalf, she said.

And while some high-carbon firms will fail to make the transition to a low carbon economy, this is an opportunity to make companies transform their business models to be sustainable, Coffey said. Our reforms will ensure trustees are held more accountable than ever before.