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UK Pension Schemes Not Adapting to Climate Risks – TPR

Industry produces 330 million tonnes of CO2 a year, according to Make My Money Matter and Route2. 

UK pension schemes are currently not doing enough to adapt to the risks posed by climate change, according to a new report by The Pensions Regulator (TPR), a UK public body that regulates workplace pensions.

“Many schemes have considerable work to do to build resilience and to assess climate-related risks and opportunities,” TPR said.

Less than half of defined contribution (DC) schemes (43%) accounted for climate change when formulating their investment strategies and approaches last year, according to the report. Further, 51% of defined benefit (DB) schemes had not allocated time or resources to assessing any climate-related financial risks and opportunities in their investment strategies, TPR said.

“We do not shy away from the acknowledgement that those figures are not good enough,” the regulator noted.

This is supported by new research published by Make My Money Matter (MMMM) and sustainability research house Route2, which highlighted that UK pension schemes currently enabled more than 330 million tonnes of carbon emissions every year.

If UK pensions industry is estimated to invest £112 billion into fossil fuels, meaning that, if the industry was a country, it would be one of the top 20 global carbon emitters, the report said.

“While pension funds do not directly produce significant greenhouse gas emissions, the way they allocate their capital has a significant impact on the long-term behaviour of the companies and countries they invest in. [Selecting] pension schemes that are more climate sensitive is an effective tool in combatting climate change,” said Daniel Dias, Route2 Founder.

Earlier research by MMMM noted that around £2 trillion in capital is currently invested in schemes that are not yet aligned with the Paris Agreement. Ahead of COP26 next week, the campaign has called for the UK government to make net-zero commitments for pension schemes compulsory.

TPR has acknowledged that it is challenging for pension schemes to account for climate-related risks due to ongoing issues with securing reliable, comparable and relevant data from investee companies.

However, the regulator noted that understanding of risks and opportunities will improve once disclosure requirements are standardised across sectors and industries. Most notably, mandated Task Force on Climate-related Financial Disclosures-aligned (TCFD) disclosures are already in place for the largest pension schemes, and will be extending to include smaller pension schemes, asset managers, insurers and companies over the next few years.

“Our report recognises that practices are evolving, and trustees – and savers – are more engaged with the need to consider climate risks. We remain convinced that a landscape of resilient pensions schemes that protect savings from climate risk is entirely within reach,” said Charles Counsell, TPR’s CEO.

Earlier this month, the UK Department for Work and Pensions’ (DWP) proposed amendments to existing rules for UK pension trustees under the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021. This included a requirement for pension schemes to report on their current portfolio alignment with the Paris Agreement’s 1.5°C above pre-industrial levels target.

TPR’s report has been published alongside a joint statement with the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and the Financial Reporting Council (FRC), welcoming the UK government’s invitation under the Climate Change Act 2008 to publish Climate Change Adaptation reports. The FCA and PRA also published their own reports on progress the financial industry has made in mitigating climate risks, as well as areas that need further improvement and policy action.

“We are focused on making sure that the risks from climate change and the opportunities from the transition to a net-zero economy are being identified and proactively managed across the financial sector. Our reports set out how climate change affects our respective responsibilities and the actions we, and the financial sector, are taking in response to it,” the regulators said.

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