The UK Government expects pension funds and investors to consider “withholding capital” or divesting from a company when it isn't “taking appropriate action” on the transition to Net Zero, according to its green finance roadmap.
Released yesterday, the document sets out the government’s long-term ambition to ‘green’ the financial system and align it with the UK’s Net Zero commitment.
In a list of stewardship-related expectations on the pensions and investment sector, the Government says investors should “actively monitor, encourage, and challenge companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation” and that “in some cases, the exercise of stewardship discipline may eventually escalate to withholding capital or divestment. For example, where a company is not taking appropriate action to transition to net zero.”
The expectations appear to be in stark contrast to Pension Minister Guy Opperman’s advice for the industry. He described divestment as “a fundamentally misguided policy”, saying that “proper stewardship and voting will genuinely transform these companies”, when giving evidence to the Work and Pensions Select Committee – an influential scrutiny body composed of MPs from all parties – which last month published a report on pension scheme stewardship ahead of COP26.
The Committee agreed with the minister, saying that “widespread divestment by pension schemes is unlikely to have the required impact on the real economy’s contribution to climate change”. It recommended that the Department for Work and Pensions sets out the steps it is taking to ensure that it does not incentivise divestment.
The Government will assess progress and follow up on what it called “stewardship discipline” in the report, as well as four related expectations – including that investors should apply to become signatories of the UK Stewardship Code and take information disclosed under the UK’s new Sustainable Disclosure Requirements (SDR) into account when allocating capital – at the end of 2023.
The government is also considering creating a league table-style approach its stewardship code, which was revamped two years ago. The code outlines stewardship and reporting standards for investors and their service providers, and by the end of 2022, the UK’s Financial Reporting Council (FRC) “will communicate an approach to differentiating or tiering signatories based on the quality of their reporting,” the roadmap said.
In September the UK audit watchdog announced it had approved 125 signatory applications and rejected 64.
The FRC will publish a review of reporting next month to “highlight effective examples and communicate its expectations for 2022”.
Yesterday’s roadmap also outlined further expectations and requirements for investors and companies on the Net Zero transition. The government expects UK investors to provide leadership by, for example, joining an initiative under the Glasgow Financial Alliance for Net Zero (GFANZ), the umbrella climate finance also set up by Mark Carney in anticipation of COP26. Investors should back this commitment up by publishing “high-quality transition plans” by the end of next year, the Government said. “This should include near-term science-based targets and set out their organisation’s pathway to net zero financed emissions.”
SDR will also require certain firms covered by the rules to disclose transition plans aligned with the government’s Net Zero commitment. Initially, this will be required on a comply-or-explain basis, but “as standards for transition plans emerge, the government and regulators will look to incorporate these into UK regulation and strengthen disclosure requirements as appropriate. This will encourage consistency and comparability in published plans and support more widespread adoption.”
It follows a call last week from investors, NGOs and large companies including Legal and General, Aviva and BT, urging the UK government to force large companies to disclose their Net Zero transition plans.