17:26 Stephen Timms (Labour)

(a) “the Paris Agreement goal” means the objectives set out in Articles 2 and 4.1 of the agreement done at Paris on 12 December 2015; and

(b) “other climate change goal” means any climate change goal approved by the Secretary of State, but does not apply to a climate change goal which fails to meet the objectives of the Paris Agreement goal.

41AA Alignment with the Paris Agreement goal

(1) Trustees or managers of occupational pension schemes of a prescribed description must develop, set and implement, and from time to time review and if necessary revise, a strategy for ensuring that their investment policy, objectives and practices (including stewardship activities) are aligned with the Paris Agreement goal or other climate change goal.

(2) Such a strategy is to be known as a “Paris-alignment strategy”.

(3) The objective of a Paris-alignment strategy must be to achieve net-zero greenhouse gas emissions by 2050 or sooner, consistent with the Paris Agreement goal or other climate change goal.

(a) requiring the trustees or managers of a scheme, in determining or revising a Paris-alignment strategy, to take into account prescribed matters and follow prescribed principles—

(i) as to the level of detail required in a Paris-alignment strategy; and

(ii) as to the period within which a Paris-alignment strategy must be developed, set and effected;

(b) requiring annual reporting on the implementation of the Paris-alignment strategy and progress against the objective set out in subsection (3); and

(c) requiring a Paris-alignment strategy to be reviewed, and if necessary revised, at such intervals and on such occasions as may be prescribed.”

This amendment enables regulations that would mandate occupational pension schemes to develop a strategy for ensuring that their investments and stewardship activities are aligning with the Paris agreement goals, and include an objective of achieving net-zero greenhouse gas emissions by 2050 or sooner.

“and alignment with achieving the objectives of the Paris Agreement goal or other climate change goal”.

“(za) provide for the Authority to undertake a review of, and report publicly on, the extent to which the activities under sections 41A and 41AA are achieving effective governance of climate change risk and alignment of pension schemes with the Paris Agreement goal;”.

This amendment enables the regulator to publicly assess the progress and development of schemes’ strategies to achieve alignment with Paris agreement goals.

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18:00 Anna McMorrin (Labour)

I was coming on to say that there are better ways we could do this. I accept that we should encourage funds as strongly as we can to use the vast sums at their disposal to support investment in climate goals and other socially positive activities, but that should be done in part through member choice. There should be eco-friendly pension schemes and socially responsible ones, but they should allow their members to choose to opt into those schemes, and not have them as the default, if they are going to have a lower pension at the end of it.

Does my hon. Friend agree that an unintended effect of amendment 16 might be that pension funds feel they have to divest themselves from oil giants and so on? Those are the companies we need to address climate change—we cannot get to net zero without working with them—and divestment is not the right approach.

I agree, and I was coming on to that argument. I am not sure that achieving net zero can be pushed down to individual pension schemes and individual investment advisers. I suspect we will have to accept that between now and 2050, there will be some businesses out there that are bad for the environment but we are still going to need their products and services. We will need some of those even after 2050. We will achieve net zero by having other businesses that are more positive for the environment, with some still being bad for it. I am not sure that we can require every individual pension scheme to be a net zero investor. Otherwise, there will be a load of things that they just cannot invest in, as they cannot achieve that strategy.

I will not address this in detail because I will have my own opportunity to do so, but I make it very clear that the amendment does not enforce or mandate pension funds to be net zero. It would ensure that they have an investment strategy, including a stewardship strategy, that is consistent with those objectives. It is drafted specifically to address those concerns and hon. Members have nothing to worry about in that regard.

I am grateful to the hon. Member, but I am not sure what the amendment would achieve then. If we say to a pension scheme, “You need to make sure that your overall investments are consistent with the nationwide net zero strategy”, they can just say, “Of course we are because there is a nationwide net zero strategy and we are just investing in legal businesses”, which we would presumably put taxes or carbon levies on to make sure we push this. It becomes a circle that would presumably mean only that the trustees have to produce a strategy and occasionally review it. It would not actually drive a great deal of different behaviour. I think I would want to see much more activist investment from pension schemes and their investment advisers to ensure that the businesses that they are investing in are sticking to their obligations and strategies on how they can reduce their impact on the environment, making sure that those promises are being kept on a management level rather than setting trustees an impossible target, which I am not sure would even mean what hon. Members seek to make it mean.

It is a great pleasure to speak in this debate today, as it was on Second Reading and in Committee. I would like specifically to address amendment 16 to clause 124. Let me start by saying how great it is that we have cross-party support for policies that push forward our efforts on climate change. We should all be very proud of the fact that we are one of the first major countries to legislate to become a net zero country by 2050. I have long talked about the influence and power of financial services and financial markets to move things forward, but sadly I cannot support amendment 16. I will set out three reasons. The first is the unintended consequences, the second concerns divestment and the third relates to focus.

I am aware that the PLSA has stated that it is concerned about this amendment, for the reasons I have described. The second reason why I would agree with the association is my fear that the amendment will imply to trustees that they have to adopt a policy of divestment. As has been seen over decades, a divestment policy, as well-meaning as it is, does not actually change the things that people are seeking to change. Part of the reason is that a stock market is essentially a marketplace, so if someone wants to divest, somebody has to invest, and therefore there is a negligible impact on the underlying company. That is why for tobacco, for climate change and for guns in the United States, the divestment policies adopted by other pension funds just have not worked. I fear that such provision would cause confusion around divestment for pension trustees. It is very hard to draw a line where the policy ends. Some may claim, or desire, that they divest from oil and gas, but where does it end? There are other sectors that clearly contribute to climate change—whether it be haulage companies, taxi companies, car companies, or aviation companies—so where does it end? That causes some confusion for trustees. An investment policy should be put in place at a ground level.

Thirdly, when compared with engagement as an investment strategy, a divestment approach is just a very weak policy. I say that as somebody who comes from fund management and managing an ESG business. As owners of companies, we could call on chief executives and chief financial officers to engage on ESG issues such as climate change. We could vote at annual general meetings. We had those companies at the table to be able to influence them. If we divest, we lose that influence—we lose that ability to change and influence a company.

Does my hon. Friend agree that the campaign that he has waged to persuade the Treasury to have green gilts available for pension funds to invest in is exactly the point that we are seeking? It would mean businesses and pension funds working in a partnership with Government and regulators to solve the problems and the issues that we need to solve to get net zero. Without that partnership, we will actually go backwards, not forwards.

I am grateful to the Minister for his generous remarks and I thank him for his support of my campaign to bring about green gilts in this country. I agree that it is a way in which pension funds can contribute to the climate change effort in a meaningful way, moving billions of pounds of capital towards the goals that everybody across this House really wants to achieve, so I thank him for that intervention.

As a trustee of the parliamentary pension fund, may I highlight that the changes on page 118 of the Bill on climate change risk are incredibly important and will help encourage trustees and pension funds in general to make investments that are pro-environment, pro-green and pro-climate change? I am absolutely in agreement with my hon. Friend that the proposed additional new clause 16, which would require pension funds to align with the Paris agreement goal, is a step too far. Does he agree that the Minister should focus on that in his summing up as well?

The last point that I will make in concluding is around this point on focus. In my experience, it is not the fund managers or the trustees whom we need to persuade or to make do anything, but the middle men and women—the gatekeepers, the investment consultants —who typically require a five-year track record and £100 million in assets held by fund managers and managed by fund managers. In my experience, that was always the issue. We were running money in a way that was really pushing things forward in terms of our climate targets. We knew that the pension clients really wanted to invest with us, but, because we could not meet the requirements of the investment consultants, we could not marry the two together. If we use the combined intellect, passion and energy of this House, from all parties, to come up with a solution to that, we could make great progress.

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18:45 Shaun Bailey (West Bromwich West) (Con)

Many of the organisations that perhaps would be impacted by this are actually the organisations that we need to lead on these new green challenges. As part of my research, I looked at some of the organisations that we might think of as ones that may need to be divested from. We looked at the oil companies like Shell, BP, Texaco and so on, and the work they have done—for example, that of Shell on biofuels, or BP on renewable energy in homes. I claim no interest—people can google it, see it and find it—but I think we risk a real unintentional consequence here of actually going backwards and almost shooting ourselves a bit, because by divesting from those schemes we inhibit the work that we need to solve this climate crisis.

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19:15 Pete Wishart (SNP)

I rise to address a number of issues. First, let me say that I fully support the amendments tabled by my hon. Friends—amendment 16 and others—on climate change. With respect to some of the comments that were made earlier, we need much more radical thinking on this if we are to see the types of fundamental shifts that we need in our economy, not just in this country but globally—recognising, of course, that pensions are invested globally—to achieve the kind of action that is needed to deal with the scale of the climate emergency. That will affect the generations to come, just as, if we do not get pensions right, the generations to come will not have the resources they thought they would receive.

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19:30 Anna McMorrin (Labour)

The climate crisis remains one of the greatest challenges, if not the greatest challenge, that we face. We are rightly focused at the moment on dealing with the pandemic and the pressures that that entails, but we cannot afford to lose sight of the growing threat of climate breakdown and the risks it continues to pose.

No one is immune to the shifting seasons or the increasing severity and frequency of extreme weathers. Droughts or flooding that impact either one community or one continent will inevitably reverberate throughout the rest of the world, presenting issues of food insecurity and water shortages, and conflict or displacement. It is imperative that legislation going through this House is responsive to that climate crisis, and it must meet our international obligations, including those of the Paris climate agreement and our commitment to limit the global temperatures increase to 1.5° C.

The previous speaker, the hon. Member for North Norfolk (Duncan Baker), is a member of the Environmental Audit Committee. I was a member of that Committee in the last Parliament, and there was an inquiry into greening finance, chaired by Mary Creagh. We found that the UK’s financial investment chain was structurally incentivised to prioritise short-term profits rather than long-term issues including the climate crisis. That needs to change. Long-term sustainability must be factored into financial decision making, and our report recommended mandatory climate risk reporting and a clarification in law that pension trustees have a duty to consider long-term sustainability, not just short-term returns.

We also emphasised in that report that enforcing those recommendations would push climate change further up boardroom agendas, where it is seriously lacking at the moment. We found through our inquiry that less than half of the 25 largest pension providers discussed climate risk at board level. Their pension schemes, including those of Aviva, Lloyds Bank and HBOS, were all considered to be less engaged than peers among the top 25, so I am particularly pleased to see that Aviva has been instrumental in supporting this amendment.

Disclosure is vital in driving awareness that pensions may be invested in fossil fuel projects, fast fashion, deforestation and extraction. Driving that awareness out there about where their money is going means that people can take control of their pension decisions and make informed choices. Pension funds risk seeing assets become worthless unless they wake up to the climate crisis. The former Governor of the Bank of England and current UN special envoy for climate action, Mark Carney, has said that we must

As my hon. Friend the Minister has said, the Bill makes our pensions safer, better and greener. I will focus my contribution today on that final point: pension policy becoming greener. Tackling climate change and getting to net zero is undoubtedly one of the country’s biggest challenges, and it is a top priority for me. The clock is ticking, and we all need to take action, from big corporates right down to the actions we take as individuals.

Our pension funds have trillions of pounds invested in assets under management, and that pension power can help us work towards achieving net zero, because when someone saves money into pensions, the pension provider takes the money and invests it in order to secure a long-term return for retirement. When those savings are in sustainable and ethical investments, such as businesses adopting similar practices to Airedale Springs, the pension can play its part by helping not only with retirement but with climate change.

The changes legislated for through the Bill open up a world of possibilities for our pensions to be invested in new and innovative technologies for the future, such as wind power, hydrogen and carbon capture and storage—technologies that help create jobs and aid the transition towards net zero. The Bill means that for the first time, pension schemes will be able to be required to take the Government’s net zero targets into account, as well as the goals of the Paris climate agreement.

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19:45 Alan Brown (Kilmarnock and Loudoun) (SNP)

I am delighted that many of my noble Friends in the other place were able to secure some important amendments to the Bill—in particular, the amendments that require trustees and managers to take into account the Paris agreement and key domestic climate targets in their overall governance and disclosure of climate change risk and opportunities. This is the first time that climate change has featured in domestic pensions legislation and that is to be welcomed.

I urge Ministers and Government Back Benchers to support Labour’s efforts to mobilise billions of pounds towards the vital and timely effort to tackle climate change through pension funds. Given that Ministers refuse to support the amendment in the name of the shadow Minister, my hon. Friend the Member for Stalybridge and Hyde (Jonathan Reynolds), on asking pension funds to develop strategies to help to meet our obligations under the Paris agreement, I hope that we will receive an explanation of how they expect to achieve their goal of net zero carbon emissions by 2050 or sooner.

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20:15 Richard Graham

The Opposition did not vote against the Bill on Second Reading, and it is not our intention to vote against Third Reading later. We agree with the broad aims of the Bill and believe that it adds a series of worthwhile improvements to our pension system. However, we have continually sought, as is the role of the Opposition, to improve the Bill further to make it the best legislation that it can possibly be. On Second Reading, I laid out how we wanted to achieve this, with additional measures to protect pensions, people and the planet. Although there was thoughtful debate in Committee, it is disappointing that the Government removed some critical parts of the improvements that were made in the Lords. That is why we have brought back two groups of amendments today, as well as seeking a new amendment, which is an opportunity to make a historic step forward in tackling climate change. I will address each in turn.

Finally, I have spoken about protecting pensions and protecting people, and now I want to talk about protecting the planet. Our colleagues in the Lords worked hard with the Government to bring in requirements in the Bill on the assessment and disclosure of climate risk in pension investments. This is a historic step: the first time it has ever been included in UK pensions legislation, and we all should and do celebrate that fact. However, we know that, with the climate emergency getting even more serious, it is possible to go even further. Amendment 16 would allow regulators to mandate occupational schemes to develop a clear investment strategy that is aligned with net zero greenhouse gas emissions at the pace the science demands.

The Paris agreement of 2016, which committed to efforts to limit global warming to 1.5° was a groundbreaking and critical step forward in global co-operation to beat climate change, but I believe we do not do enough to explain to the public and our constituents that the changes we need will only be delivered by starting to influence how vast amounts of private capital are allocated, alongside direct Government decisions on, for instance, decarbonising power and transport. I have to say that I would have thought that argument would garner more sympathy with Conservative Members of Parliament.

UK pension funds represent trillions of pounds, and steering more of that towards our climate goals, yes, would be radical, but this amendment is not just about where capital is allocated. It is about the stewardship that we need to see from all asset managers over the companies they have investments in. This is not a divestment amendment, nor does it limit the choices available to fund managers. The hon. Member for Grantham and Stamford (Gareth Davies) said that the ESG data is patchy, and he is right, but he will appreciate that asset managers demanding better data have been a fundamentally important driver in making that better, and the E—environmental—is actually the most robust part of ESG data. It does not make sense to me to say that the data exists for the Government to issue a green bond, but not for a pension fund to formulate a Paris investment strategy.

We, as the Opposition, ask the Government to deliver a green economic recovery from the pandemic by investing to support the creation of at least 400,000 new jobs, but achieving progress on climate change demands change in every part of our economy, and despite what we have heard from Government Members today, the industry is already showing us what is possible. Aviva, one of the UK’s biggest pension providers—it supports this amendment —has recently announced that its auto-enrolment default funds will aim to achieve net zero by 2050. That is £32 billion of capital, which is actually going beyond the scope of this amendment. In October this year, the BT Pension Scheme set a goal of net zero by 2035 for its entire portfolio, worth £55 billion. There is also a great deal of good practice in public sector DB schemes, such as the Local Government Pension Scheme.

In addition, the investment case makes this simply the right thing to do. The Department for Work and Pensions has itself acknowledged that considering the financial impacts of climate change is consistent with fiduciary duty. Pension funds are long-term stewards of capital. What could be more long term than the sustainability of our environment and our economy? These two objectives simply do not conflict. As is said in an excellent comment piece in The Daily Telegraph today—that in itself is a sign of the times—it

I reiterate that this is not about the Government dictating to pension funds about when and who to invest their money in, and we are not seeking to compromise trustee independence. It is simply about putting a strategy in place that considers their role in meeting our climate objectives. Trustees can maintain their total discretion over what strategy they choose to achieve that goal. Furthermore, this proposal is designed to allow the Government the flexibility to guide schemes via regulations to ensure that trustees have a strategic plan to become Paris aligned over a period of time. Any measures resulting from this amendment would be subject to extensive consultation with market participants, so that their design could take into account what works best for schemes of different types and sizes. This is written to be as accommodating as possible. The Chancellor of the Exchequer came to the House last week and outlined his ambitions to make the UK a leader in green finance. It is true that we have been lagging behind our European counterparts for many years when it comes to green bonds. As the shadow Economic Secretary in the last Parliament, I made that point frequently, and I was often given reasons why we could not do that similar to those we have heard today against amendment 16. I am tempted to say that if we wait until the end of this Parliament, even this amendment may well become Government policy.

With the new US Administration poised to rejoin the Paris agreement in 2021 under the new leadership of President-elect Joe Biden, I put it to the House that we can make this an even more historic week for tackling climate change by passing amendment 16 today. That is why we seek to include it in the Bill.

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20:30 Guy Opperman

This is a hugely important piece of legislation. It is a landmark Bill. It will impact the lives of millions of people across this country and it will make our pensions safer, better and greener. I genuinely believe that the work we are doing on CDCs and the pensions dashboard, the fact that we are giving real powers to the regulator and taking the opportunity to crack down on the callous crooks who take our constituents’ pensions, the work we are doing on scams, and the fact that we have for the first time put climate change at the heart of pensions means that this will be groundbreaking legislation that we should all be proud of. I welcome the cross-party support that we have heard.

I turn to the amendments to clause 124—the climate change clause—tabled by the Labour Front Benchers. I am afraid the reality is that Labour’s proposals would direct investment, breach fiduciary duties and lead to divestment and negative outcomes. We want the transformation of the United Kingdom economy and the retrofitting of the country to happen in a partnership with business, legislators, pension schemes and citizens, but I am afraid the amendment would negatively affect that. It would be entirely the wrong way forward.

This is the factual reality: we are already doing what is in the key parts of the amendment in clause 124 as introduced in the House of Lords. In the space of two years, the DWP has made regulations on environmental, social and governance criteria, on stewardship investment and now, in clause 124, on mandatory climate change governance and reporting. We need to allow our proposed policy measures to take effect before reviewing their impact and contemplating further measures. Of the 50 large pension schemes I wrote to last year, 70% are going well beyond the minimum legal requirements. Many have gone considerably further in the past 12 months, as nudged and persuaded by the Government. Fiduciaries do not need such a blunt measure in order to act, so we strongly reject the amendment.

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