Workplace pension schemes will be required to measure and publish how their investments support the Paris Agreement climate goal, the Department for Work and Pensions has announced.
The Paris Agreement has set a goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels.
For the first time, pension savers will be able to see the impact of their investments and better understand how the climate risks are being considered and mitigated via climate reports from their pension scheme.
The new rules will mean that from October this year, more than 80% of UK pension scheme savers will be invested in pension schemes subject to these new requirements.
Secretary of State for Work and Pensions Therese Coffey said the rules would see pensions transformed into a superpower, delivering prosperity for the people and the planet.
“We’re paving the way for greener pensions which can offer sustainable returns for members while accelerating our net zero ambition and supporting local jobs,” she said.
Commenting on the new rules, Tom Selby, head of retirement policy at AJ Bell, said: “Environmental, social and governance investing is now bang in the mainstream. Pensions are an obvious target for environmental campaigners because of their sheer scale. Total private pension wealth in the UK is estimated to be north of £6 trillion, while automatic enrolment is bringing millions of new savers into the system.
“Many of these new savers, particularly younger generations, would rather their money be invested in a way which doesn’t damage the planet. If pension investments can be marshalled effectively, it could fundamentally shift the way companies seeking that valuable investment behave.
The hope here is that sunlight will be the best disinfectant, with greater transparency forcing firms to adjust their behaviours and processes in order to meet the demands of pension investors.
“One of the key challenges will be ensuring the plans don’t result in a blanket anti-emissions approach being taken by pension schemes. Encouraging businesses operating in high emissions sectors who are making genuine efforts to reduce those emissions, for example, could be just as valuable as boosting firms that are already ‘green’.”
Selby said that in reality, these new rules will “simply codify” something that is already happening in response to growing investor demand.
Selby added: “Over the longer-term we expect savers to take a much keener interest in how and where their retirement pots are invested, so there is every chance firms will need to go above and beyond these requirements to satisfy members.”
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