The Pensions and Lifetime Savings Association (PLSA), the main UK pensions industry body, has called for the term ‘climate change’ to be omitted from a planned update to trustees’ duties, saying it risks being “unintentionally prescriptive”.
The PLSA, which represents more than 1,300 pension schemes with just over £1trn (€1.1trn) in assets, was responding to a government consultation on clarifying and strengthening trustees’ duties, organised by the Department for Work & Pensions (DWP), which closed yesterday.
The updated rules, due to take effect as of October next year, would mean funds having to change their SIPs (Statement of Investment Principles) under the Occupational Pension Schemes regulations.
The PLSA argues that highlighting an “example factor” like climate change means that trustees “might infer that this is the ‘most important’ ESG factor to consider, when other factors such as resource depletion or human rights abuses might be more relevant to their portfolio”.
It says there have already been challenges from the “inclusion of specific words” in investment regulations and this must be avoided.
“We therefore do not believe that ‘climate change’ should be included specifically in the drafting of the new regulations that could result in the regulations being unintentionally prescriptive.” The PLSA submission – written by PLSA policy expert Caroline Escott, the former Head of Government Relations at UKSIF – says the regulations need to be flexible to deal with emerging risks.
But the DWP draft does not limit environmental matters to ‘just’ climate change. On the environmental side it mentions resource depletion, including water waste and pollution, deforestation. On the social side it refers to working conditions, including slavery and child labour; health and safety; employee relations and diversity; ageing populations; social unrest.
It adds: “We do not want to be too prescriptive and industry terminologies, in time, may change.”
The PLSA’s stance on the ‘climate change’ term contrasts with that of actuaries and fund managers.The submission from the Institute and Faculty of Actuaries (IFoA) said: “The DWP’s explicit mention of climate change as a consideration for trustees is a big step forward.”
This view was echoed by the Investment Association, which said the “enhanced focus” on long-term, financially material factors, including ESG (including climate change), in SIPs was a “welcome step ensuring clear alignment of long-term factors in the investment chain”.
“This will signal greater demand for the consideration of these factors by asset managers.”
It comes as another part of the market, the banking sector, today launched a set of methodologies to help it face climate change. It’s the result of a joint effort by 16 global banking institutions coordinated by the United Nations Environment Programme-Finance Initiative.
It’s hoped banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics.
Elsewhere in its submission, the PLSA says it does not support the government’s proposals to bring scheme members’ views into account, saying its could “side-track” trustees.
It goes on: “We are concerned that amending the regulations to include explicit reference to a scheme’s approach to considering member views may confuse trustees – who have limited time to consider a broad variety of issues at each meeting – and they may be side-tracked into focusing on member views (which may differ widely) on non-financial matters instead of material ESG considerations.”
The body is worried that a scheme member who expresses a view but “then does not see action” will be “de-motivated” and “less encouraged to engage with their pension savings and options”.
And the association, while supporting the government’s commitment to social impact investment, says that trustees should not be required to state a policy in relation to social impact investment saying the area is “in flux”. This view was echoed by the Investment Association.