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ClientEarth Communications

3rd September 2020

Climate finance

The UK Pension Schemes Bill: a climate game-changer?

Why are we talking about pensions and climate in the same breath?

Pensions exist to secure our futures. Their aim is to provide each of us with long-term financial support, but they also affect the health of the global financial system and the natural world. The UK pensions market is worth around £3 trillion, investing money on behalf of millions of UK citizens every year. Savers are often unaware however, that a considerable amount of this money is channelled into businesses actively fuelling the climate crisis.

This not only has a negative impact on the planet directly, but also poses a significant financial risk to our pensions, endangering individual assets as well as the overall global financial system.

Our pension schemes are failing to adequately address climate risks, and are contributing to climate change. But ClientEarth believes the pensions industry can play a crucial role in a solution which goes to the very heart of the system, and we are working with the law to ensure it does. One potentially game-changing example of this is our work on the Pension Schemes Bill.

What is the Pension Schemes Bill?

The Pension Schemes Bill is a draft piece of legislation making its way through Parliament. The Bill contains many different provisions, which apply to a large cross-section of workplace pensions. Its overarching objectives are the protection of people’s pensions, supporting savers and ensuring pension schemes are fit for the future.

Pension schemes have existing legal obligations to act in the best interests of their members, and consider matters that could affect the investments they make, including climate change risks. If pension schemes are to be fit for the future, they, like all in the financial sector, must take strategic action to contribute to the pursuit of the Paris Climate Change Agreement goal: to keep climate change as close as possible to 1.5 degrees.

We have been working with the Government and a cross-party group of peers in the House of Lords to make amendments to the Bill, which will strengthen the duties on pension schemes regarding climate change.

How does climate change feature in the Bill?

Two major climate change amendments have now been put forward by the Government, which form a clause entitled ‘Climate Change Risk’. The Bill and subsequent regulations should ultimately require action on governance and disclosures by pension schemes, focusing on the risks and opportunities of transitioning to a low carbon economy.

This legislation should lead to much greater transparency on how pension schemes are addressing climate change, which benefits us as pension savers, and encourages best practice between schemes. It should also cause a rapid evolution in how schemes and actors along the chain of investment respond to climate change challenges.

The next moves

Once Parliament returns from recess this month, the Bill will have its Second Reading in the House of Commons and proceed through the remaining Parliamentary stages. In the interim, the Government has already launched an initial consultation on next steps with potentially ambitious proposals.

The Minister for Pensions, Guy Opperman MP, is championing climate change issues within government, and we look forward to continuing to work with him and other MPs to further strengthen the Bill and regulations.

With one of the Government’s priorities for COP26 being climate finance, there has never been a more important time to ensure the pensions industry is working to tackle the climate crisis, and protecting savers’ pensions. This legislation could make all the difference. And we intend to ensure it does.