Pension schemes can and must make a difference in the transition to a net-zero economy, David Fairs, the UK pensions regulator’s executive director of regulatory policy, analysis and advice, has said, calling for clearer instructions for investment managers as part of an “essential” stewardship policy.

Fair’s intervention comes a day after the Intergovernmental Panel on Climate Change published a report laying out that unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to 1.5°C or even 2°C will be beyond reach.

In his blog, Fair said he disagreed that pension scheme trustees could do little in the face of global temperature rises, as some argued.

“The way a scheme’s investments are stewarded, or looked after on behalf of savers, does have the potential to be powerful,” he wrote. “Powerful in protecting, or even enhancing, savers’ retirement outcomes.

“Asset managers and companies may be closest to the flows of capital, but it is the responsibility of trustees to set the policy on how financially material considerations, such as climate change, are taken into account in the selection, retention and realisation of pension scheme investments,” Fairs added.

david fairs

David Fairs, executive director for regulatory policy, analysis and advice at the UK’s pensions regulator

He called on trustees to be clearer with their investment managers about their expectations for stewardship related to environmental, social and governance matters, and said a stewardship policy was essential, “with clear goals and plans for next steps if stewardship isn’t influencing as desired”.

He said the regulator encouraged trustees to sign up to the 2020 Stewardship Code, “which outlines best practice on improving investment governance and risk management while driving long-term success; and on communicating activity and progress towards addressing systemic risks such as climate change”.

Fairs concluded: “Climate change has the potential to be the biggest threat to the stability of the systems on which pension savers depend for access to their savings at the end of their working lives. But that doesn’t mean we are powerless in the face of that threat.”

From October UK pension schemes with assets under management of £5bn (€5.9bn) or more will have new obligations for governance and reporting of climate-related risks and opportunities. Schemes with assets under management of £1bn will face these requirements in 2022.

The regulator recently closed a consultation on its guidance related to these new rules.

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