Sustainable pension investments - the position ahead of COP26

Towards the end of this month, the UK will host the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow. COP26 will bring parties together to accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change.

This year’s summit is particularly important, being the first global conference since 2020, the year by which countries were required to submit their plans for climate action pursuant to the Paris Agreement. The weight of expectation being placed on COP26 is not lost on pensions legislators, with the UK Parliament’s Work and Pensions Committee encouraging the UK Government to use the event as “an opportunity to make every endeavour to build an international consensus on the role of pension schemes”.

There has been a considerable push for climate-conscious investment by pension schemes ahead of COP26, and our previous blog post provided a summary of the various initiatives in the UK legislative and regulatory space. Alongside these developments, earlier this year Make My Money Matter called on the pensions industry to agree to net zero emissions targets for all investments by COP26. This call to action forms part of the Green Pensions Charter, which currently counts over 60 leading organisations as signatories.

Legislative reform in this area is also moving at speed ahead of the summit. The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (the Regulations) finally came into force on 1 October 2021, imposing a range of new obligations on pension scheme trustees. The Regulations form a key part of the UK Government’s private finance strategy in the run-up to hosting COP 26. We have covered the detail of the Regulations in our earlier blog post, but the key new obligations on pension scheme trustees include the following:

• identifying on an on-going basis climate-related risks and opportunities and their impact on the pension scheme’s investment or funding strategy;
• selecting metrics for determining the greenhouse gas emissions attributable to pension scheme investments and which inform the assessment of climate-related risks;
• designing strategies to mitigate exposure to risks and establishing measurable targets in managing these risks; and
• undertaking scenario analyses which consider the impact of global rises in temperature on the resilience of the pension scheme’s investment or funding strategy, as well as its assets and liabilities.

These measures will contribute towards the UK becoming the first economy to mandate Task Force on Climate-related Financial Disclosures (TCFD) reporting for its pensions sector. Looking beyond the UK, there have been similar regulatory developments in the EU, where the provisions of the Sustainable Finance Disclosure Regulation (SFDR) have applied since March of this year. The SFDR requires in-scope firms, including pension schemes, to disclose how sustainability risks are incorporated into the investment decision-making process. Similarly, the Australian Prudential Regulation Authority has released draft guidance to assist regulated entities, including superannuation trustees, in managing climate-related risks and opportunities as part of their risk management and governance frameworks.

It is clear that pension providers and policy-makers are taking the issue of climate change very seriously, and the Regulations (among other measures) aim to ensure that climate-conscious investment remains at the forefront. This is particularly important in the pensions sphere because occupational pension schemes are the largest single group of institutional investors in the UK (holding almost £2 trillion in assets according to the House of Commons Library), with significant influence over the flow of investments in the economy. It will therefore be interesting to see how COP26 impacts the landscape for sustainable pension investments in the months and years to come.

Read more about the role the law can play in supporting investors to pursue sustainability goals in A legal framework for impact, Freshfields analysis of 11 global investment hubs commissioned by PRI, UNEP FI and The Generation Foundation.