UK lawmakers call for mandatory climate fund labels and default pension fund disclosures

UK lawmakers have called on the Government to consider introducing mandatory climate labelling for financial products.

A report into the decarbonisation of the UK economy and green finance released by the Treasury Select Committee, an influential scrutiny body composed of government and opposition MPs, said that financial products should be “clearly labelled” to allow consumers to assess the relative climate impacts of products. 

It also called for the Treasury to regularly report on the Net Zero alignment of default funds for defined contribution pension schemes, saying that the Government’s current approach presented an “apparent contradiction” because default funds are not required to transition to greener strategies, but the Government “maintains that consumers should not have to switch out of the default fund to invest responsibly”.

The report follows a year-long inquiry by the Committee, which took written and oral evidence from major investors, government bodies and NGOs including the Bank of England, London Stock Exchange Group and BlackRock.

The group also recommended that the UK’s pension regulator should look at introducing ESG regulations for smaller defined benefit schemes that aren’t covered by new rules on TCFD reporting. 

While all schemes with more than £1bn in AUM will be required to report against TCFD requirements by October 2022, the Committee said that the aggregate impact of smaller schemes could still have an effect on the UK’s Net Zero target.

Lauren Wilkinson, Senior Policy Researcher at the Pensions Policy Institute, said: “These proposals are in line with other work being conducted to help ensure pension scheme members’ contributions are being invested in a sustainable way, and should help sustain the momentum and urgency felt by many stakeholders to ensure that climate considerations are taken into account by institutional investors.”

“In order to make sure that schemes can effectively improve the way in which they approach climate change risks, there may need to be increased reporting regulations placed on external asset managers and investee companies.”

Mel Stride MP, who chairs the Committee, said: “The Government, private finance, consumers, and regulators all have vital roles to play in helping the UK to achieve net-zero carbon emissions by 2050.”

“The UK is a global leader in financial services. When the world’s eyes are on us for COP26, we must show that we can also be a green finance powerhouse to help achieve Net Zero.”

The report also criticised the UK’s slowness in issuing green bonds. While the Committee welcomed plans to issue the UK’s first sovereign green bond, they noted that the UK was well behind other European countries in doing so, and “[runs] the risk of holding back the development of a private sterling green bond market”.

Other recommendations in the report include ensuring the Financial Conduct Authority has appropriate powers to combat greenwashing, ensuring the UK’s green taxonomy is in place for COP26, and making sure that labels and descriptions of climate-related indices “accurately reflect their content”.

This week, the UK moved forward on the development of a green taxonomy, by announcing the secretariat for the project, the Green Finance Initiative. 

Meanwhile, the EU also moved forward this week in efforts to ensure asset managers incorporate sustainability into fiduciary duties and suitability tests. The Commission announced on Wednesday its adoption of six amended delegated acts requiring asset managers, insurers and advisers to consider sustainability when designing financial products and giving investment advice.