Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021

Lord Davies of Brixton Excerpts

Monday 5th July 2021 Grand Committee

[Lord Davies of Brixton (Lab) [V]]

My Lords, I am in favour of these regulations and I take this opportunity to thank and congratulate the Minister and her colleagues, to whom she has given much of the credit, on the work they have done on climate change. I will pass on the opportunity to say something more generally about the Government’s record on the issue, but here we are on the right track. This is not the end of the journey, of course, because there is always further to go.

Today, it is appropriate to pay tribute to all the work that was done in the Lords during the passage of the Pensions Scheme Bill. I was frustrated in my wish to take part, but no matter. The level of expertise as well as of concern about the issue was outstanding. I have thought of naming names, but having gone back and reread the debates it was interesting that there was clearly a collective effort in the House and behind the scenes. Those who took part know who they are, not least those taking part in today’s debate, and they are owed a sincere vote of thanks.

The adoption of these requirements is one element in a wider push to ensure that the effects of climate change become routinely considered in business and investment decisions. The adoption of these recommendations would also help a range of institutions better demonstrate responsibility and foresight in their consideration of climate issues. That will lead to smarter and more efficient allocation of capital and help smooth the transition to a more sustainable, low-carbon economy.

We must therefore welcome the recent move by the FCA to consult on a climate-related financial disclosure regime for asset managers, life insurers, and, not least in this context, FCA-regulated pension providers. That will be consistent with the recommendations of the task force on climate-related financial disclosure. The FCA states that its proposals aim to increase transparency and enable clients and consumers to make considered choices while remaining proportionate for firms. These proposals will need to be considered carefully as the term “proportionate” can hide a multitude of problems, but let us see.

One issue that arose during the passage of the Bill was the Government’s claim that their intention was to ensure effective governance of climate change risk but not to direct trustees’ or managers’ investments. The Minister reiterated that point in her remarks. This was specifically with reference to the proposed requirement that the governance of schemes align with the Paris Agreement’s objective of global warming of well under 2 degrees Celsius. During those debates, the Minister expressed the view that this could be tantamount to directing schemes’ investment, which the Government had ruled out. I have some difficulty here because my understanding is that progress towards the Paris target is now legally binding, not a matter of personal preference. The distinction being made is, in practice, without a difference. Ultimately this is going to affect investment decisions, or we will fail in the objective of combating climate change.

Another issue that arose in the debates on climate change during the passage of the Bill was use of the words “may” and “must”. I am pleased to report that in the regulations “must” is in the lead with 50 occurrences compared with 30 for “may”, but I am unclear what this means in practice. As a rough generalisation, it appears that “may” is used more in the context of enforcement, which means that discretion of some sort is being exercised by the appropriate regulator. It would be good if we had the possibility—at an appropriate stage, not now—for interested parties to discuss how this discretion will be exercised, which bodies will have enforcement taken against them, which will not, and what criteria are to be applied in making that choice.

Lastly, this is just to demonstrate that I am paying attention. Can the Minister assure us that the loss of a hyphen in the term “ear-marked scheme” between where that is defined in the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 and these regulations is of no significance?