2nd May '23
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Every month, employees over the age of 22 and their employers pay into pensions. Pension funds are then managed and invested by fund managers. Traditionally, funds were invested in high-value necessities like oil, petroleum and other similar commodities.
However, as climate change has exponentially worsened, the government has introduced legislation and guidance to ensure that billions of pounds in pension funds are responsibly managed in line with overall carbon Net Zero targets and the Paris Agreement, a legally binding climate change agreement signed by nearly 200 global parties.
But how will this affect businesses, their employees and their respective pension funds?
As it stands, the current higher-value pension investments are in so-called dirty or brown investments, due to the nature of the impact they have on the planet. These include the likes of oil, coal and gas mining, which are all finite resources, as well as harmful companies, such as arms manufacturers and gambling facilitators. While valuable now, these investments are likely to plummet in the long term as the world moves to more renewable sources of investment such as wind farms, or recycling companies for example.
As of 2018, there is over £6 trillion of private pension wealth in pension funds meaning there is sizeable buying power and investment backing available within the UK’s pension fund schemes. It’s therefore important to ensure that pension funds are being managed responsibly, and in line with global climate targets.
The UK government has introduced a range of measures to inform investment managers, strategists and trustees of pension funds on how they should make decisions on where the money held in pension funds is invested. These are namely the TCFD, Taskforce on Climate-related Financial Disclosure and the Pension Schemes Act 2021.
As climate change is, in equal parts, a financial risk and an investment opportunity for pension schemes, TCFD guidance recommends the use of the TCFD framework to report on climate change risks. The TCFD is spearheaded by the Pensions Climate Risk Industry Group, which is a cross-industry body to oversee green decisions on pensions.
The TCFD framework is a flexible set of 11 disclosures that show the risks and opportunities presented by climate change. These disclosures help to make better informed and more transparent decisions around climate change and financial investments.
A large part of TCFD guidance that pension scheme operators will use is scenario analysis. This analysis presents a set of scenarios that shows how investment changes will affect pension schemes. These use a combination of transition risks, which are economic system risks that are due to the alignment with low, no or carbon-positive solutions, and physical risks, which relate to the impact that climate change will have on the planet, and therefore businesses by default. The three scenarios, as created in 2017, are:
In the Pension Schemes Act 2021, there is a crossheading dedicated to climate change risk. This section includes measures such as:
This places an onus on trustees of pension schemes to secure “effective governance of the scheme with respect to the effects of climate change.” For trustees of pension schemes, there is now more expectation that the direction of a fund will be towards green investments and that all strategies support this.
There are also new requirements to freely share such information with the public to help give those choosing a pension provider knowledge of where their money, and their employees’ money, will be invested.
For employers, climate change risk management is slowly trickling down. While responsibility has largely remained with banks, investors, pension schemes and large corporations, employers of all sizes will inevitably have to begin to report on climate impact.
This will include things like ensuring pension schemes chosen are meeting climate targets, as well as other responsibilities that are still being speculated on, such as emissions reporting. So, how can you ensure that your chosen pension scheme meets climate requirements?
Our cloud-based payroll software reduces the reliance on paper and ensures that you can move to greener pension schemes with ease.
Why not give it a try today? Get a demo.Duane Jackson, December 15th, 2022