The UK’s Department for Work and Pensions (DWP) would have concerns about pursuing the sustainability impact-focussed approach of the EU sustainable finance disclosures regulation (SFDR), comments from a senior policy official at the DWP suggest.
David Farrar, policy lead for climate governance and ESG at the department, was speaking during IPE’s Summer Pensions Congress, responding to a question about the DWP’s thinking about following the EU SFDR and whether reporting on so-called principal adverse impacts, as provided for by that regulation, was coming towards UK pension funds.
He said the DWP was not in a position to confirm one way or another the extent to which measures stemming from the European Commission’s sustainable finance action plan would apply in the UK, as much would depend on how much EU market access the UK ended up with.
He nonetheless made two points, in a bid “to avoid answering the question altogether”.
Specifically in relation to the SFDR, Farrar contrasted its being “quite focussed on impact” with the approach the DWP was taking, distinguishing the focus on impact from one on sustainability risk.
“Most of the way we want to encourage pension schemes to approach this, which we think goes with the grain of trustee decision-making, is in terms of thinking about your beneficiaries,” he said. “Clearly there are a lot of common goods, but we would be saying that if every occupational pension scheme considers its own beneficiaries then they will manage the impact.
“Giving them a duty to manage an impact more nationally in terms of furthering social policy goals can, I think, become more problematic, because there is a certain point where trustees might be on the horns of a dilemma between acting in the best interest of their members and maximising the wider social or environmental impact,” he added. “That’s not a dilemma we want to put trustees into.”
The SFDR does not impose a duty to manage investments’ sustainability impacts, but does introduce a reporting regime for financial market participants, including pension funds, in relation to their consideration of investment decisions’ “principal adverse impacts”.
The regime is to be “comply-or-explain”, except for financial market participants with 500 employees or more.
Farrar also indicated the DWP wanted disclosure measures to be “purposeful” and that it was thinking about the proportionality of requirements it was imposing in relation to reporting against the Task Force on Climate-related Financial Disclosures (TCFD) framework.
“We want TCFD to be something valuable rather than just an additional disclosure burden that doesn’t actually have any practical impact on the way pension schemes function,” he said.
Reiterating what the government set out in its green finance strategy last year, Farrar said the DWP was thinking about the reporting requirements “in terms of larger asset owners”.
With respect to the SFDR, he explained that, if the UK were still in the EU and the regulation was becoming directly applicable now, it would apply to pension schemes with 100 or more members.
“That’s a lot of schemes and a lot of formulatic disclosures,” he told IPE.
According to Farrar, average assets under management for a 100-member defined contribution occupational pension scheme in the UK are around £10m (€10.8m).
Implied temperature rise reporting on the horizon
The DWP is pursuing measures that will allow it to require UK pension schemes to report against the recommendations of the TCFD. Draft pensions legislation, which completed its passage through the House of Lords yesterday, also provides for pension funds being required to take into account the UK government’s net-zero emission targets, as well as the Paris Agreement goal.
Speaking during the Congress, Farrar said a duty to take into account the Paris Agreement goal would not mean a duty to align with it, as DWP would see this as directing schemes.
Instead, DWP could encourage or mandate pension schemes to report an implied temperature rise in their portfolio, “for the purposes of understanding how exposed to climate change risk they are”.