UKSIF, the UK’s leading membership organisation for sustainable finance, has today (10 May) launched a flagship report outlining the UK sustainable finance sector’s vision for how the UK can become the ‘world’s first net-zero financial centre’.

The report, Delivering a net-zero financial centre: Recommendations from UKSIF’s ‘net-zero inquiry’, is a direct response to the UK government’s announcement made at COP26 last year, which committed the UK to this specific objective, and identifies a series of key steps for government, regulators and the financial services industry to adopt to help achieve this vital goal. Specifically, the report makes clear that the UK must continue to lead the way in tackling the climate crisis by ensuring the alignment of financial flows with a net-zero pathway as quickly as possible. This mission has become increasingly pressing in light of stark warnings from the Intergovernmental Panel on Climate Change (IPCC) and others of the need to ensure greenhouse gas emissions peak as soon as possible to address the climate crisis.

The report presents a series of measures to drive the systems change necessary to move the sector far more rapidly towards net-zero, and help achieve the UK’s world-leading ambition made at COP26. This includes ambitious recommendations on: transforming the real economy to drive net-zero aligned investing and lending; creating a world-leading ‘green taxonomy’ and sustainability disclosures framework; strengthening investors’ stewardship role in the economy; supporting communities, clients, and savers on the journey to net-zero; and shifting the whole financial sector and economy to net-zero, including parts of the system that have not been prioritised in rulemaking.

UKSIF’s 290+ members represent over £10trn in assets under management (AUM). They have an absolutely critical part to play to advance the rapid decarbonisation of the economy and address many of the pressing social challenges facing the country that are key to delivering net-zero. As well as highlighting priority areas for swift action by government and regulators, the report recognises too the enormous responsibility of UKSIF’s members to contribute to building a sustainable future at the rapid pace and scale that is needed.

James Alexander, Chief Executive of UKSIF, said: 

“At COP26 last year, the Chancellor of the Exchequer boldly, and rightly, committed the UK to becoming the world’s first net-zero financial centre. Six months on from this commitment, there remains a lack of clarity on the steps we need to take to achieve this objective and rapidly shift financial flows and investments towards net-zero at the scale that is required.  

Our report’s recommendations identify those areas where much further action is needed by policymakers, regulators, our members, and others to help achieve this shared goal. It recognises the UK sustainable finance sector’s growing ambition and responsibility to move far more quickly towards a sustainable future, and responds to the stark warnings from the IPCC and others on the need for rapid and transformational action.

We remain committed to working with government, regulators and our members to progress the recommendations in our report, from the effective transformation of the real economy to creating a world-leading ‘green taxonomy’ and enhancing investors’ stewardship role. We know that time is fast running out, and we do not have a moment to lose.”

Summary of UKSIF’s report:

Six months on from the UK’s hosting of COP26, now is an opportune time to set out the sustainable finance sector’s roadmap to deliver the world’s very first net-zero financial centre. A short summary of the report’s policy asks across five key areas is below.

• Transforming the real economy to drive net-zero aligned investing and lending: Government should prioritise rapid action on a specific set of sectors to drive forward their decarbonisation, convening a series of ‘clean investment roadmaps’ for priority sectors where policy clarity is notably lacking, adopt a comprehensive carbon pricing system, and deliver a fresh commitment on energy efficiency in homes to tackle the climate and ‘cost of living’ crises. More broadly, a ‘net-zero test’ applied across government decision-making can drive the change we need to see in the real economy for finance to reach net-zero.
• Creating a world-leading ‘green taxonomy’ and sustainability disclosures framework: The UK will need to learn the correct lessons from the EU’s recent experience with its ‘green taxonomy’, ensuring the UK creates a taxonomy based purely on science by avoiding the inclusion of certain natural gas activities. The UK should seriously address wider sustainability issues, publishing a roadmap for the creation of a ‘social taxonomy’ and undertaking a comprehensive response to last year’s report from Professor Sir Partha Dasgupta on ‘The Economics of Biodiversity’.
• Strengthening investors’ stewardship role in the economy: The UK should build on the success of its Stewardship Code in the coming years. Separately, we support the principle of a ‘Say on Climate’ advisory vote for shareholders to help investors better scrutinise companies’ decarbonisation strategies. On climate transition plans, these should offer a holistic view of a company’s plans to transition and go beyond a focus on net-zero milestones alone, as important as these are.
• Supporting communities, clients, and savers on the journey to net-zero: We continue to back the creation of a UK Just Transition Commission, based on Scotland’s experience, to identify areas for policy action. Among investors, greater recognition needs to be given to a ‘Just Transition’ as part of their commitments on net-zero and comprehensively reflected in engagement activity. Furthermore, policymakers should urgently clarify that ESG issues (both risks and impacts) are a core component of fiduciary duties.
• Shifting the whole financial sector and economy to net-zero, including parts of the system that have not been prioritised in rulemaking: We strongly believe ESG data providers should now be brought within the UK’s regulatory perimeter, as ESG data provided by this industry becomes ever more crucial to firms’ decision-making. More robust corporate disclosures will improve the quality of ESG data, and we would like to see unlisted companies start to disclose to the same extent as listed companies including in relation to their climate transition plans.

Each year, we aim to get a sense of where the retail market is in its acceptance and demand of sustainable, ESG, impact, and ethical investment and finance. This is usually achieved through YouGov research providing a snapshot of public attitudes. This year we decided to dig deeper. We commissioned FinText to conduct a social listening exercise whereby they analysed public conversations between private investors on the Reddit platform from January 2019 to August 2020.

UKSIF calls on regulator to investigate pensions’ “thin and non-committal” approach to climate risk management.

• A majority of pension scheme trustees believe ESG issues, including climate change, will negatively affect the value of savers’ money, finds report by UKSIF
• Report finds most pension scheme trustees have adopted “thin and non-committal” policies to manage environmental risks, and many have not complied with minimum legal obligations
• UKSIF call for government to create new public registry for pension scheme investment policies

London – 6 February 2020

Pension scheme trustees are failing to comply with their investment duties according to a new report from the UK Sustainable Investment and Finance Association (UKSIF). Following a change to the law in 2019, trustees must publish their approach to protecting people’s pension savings from the financial risks of climate change and other environmental, social and governance (ESG) issues.

UKSIF found that only one third of a representative sample of trustees have complied with the legal transparency requirements, and are calling for the Pensions Regulator to carry out a review to investigate levels of compliance across the UK’s pensions sector.

UKSIF’s review looks at the different policies trustees have adopted to comply with the new regulations. It found that although a majority of trustees say they believe ESG issues will affect the financial performance of their scheme’s assets, most trustees have adopted “thin and non-committal” policies to manage ESG financial risk. This comes despite Bank of England Governor Mark Carney’s warnings that climate change poses risks to pension funds.

The report calls for:

• New central registry for investment policies

UKSIF are calling on the government to set up a central registry to host trustees’ policies on ESG issues. The report notes that many pension schemes do not have websites, and may face practical challenges to publishing their policies online. As a solution, UKSIF are calling on the government to establish a central registry to host trustees’ policies, thus reducing the administrative burden on pension schemes. This would be similar Modern Slavery Registry, set up under the Modern Slavery Act 2015.

• Further guidance and support for trustees

Both government and regulator are urged to provide trustees with more guidance and materials to educate them about how to manage climate-related financial risk. UKSIF found evidence that suggested trustees lacked the expertise or knowledge required for manage financially material ESG risks. The report suggests ways for trustees to discuss ESG issues with their investment managers.

Ben Nelmes, Head of Public Policy at UKSIF said:

“Trustees are responsible for ensuring that millions of UK workers’ retirement savings are managed responsibly; they must have a policy to manage any kind of financial risk, including from climate change.

“Our findings suggest that many trustees have failed to comply with their legal requirements to publish their approach to managing material environmental, social and governance risks.”

“The Pensions Regulator should launch a thematic review to investigate whether the industry as a whole is fulfilling its responsibilities under the law and to savers.”

On the central registry:

“Trustees must be transparent about how they manage people’s pension savings, but too many schemes do not make the right information publicly available.

“Ministers should amend the Pension Schemes Bill when it goes through Parliament to create a registry and let savers see how their money is being managed.”

Notes to editors

About the report

UKSIF reviewed policies in the Statements of Investment Principles (SIPs) published by trust-based pension schemes offering DC benefits between 1^st October and 31^st November 2019. UKSIF looked at a sample of 70 pension schemes, which was expanded after evidence of non-compliance was discovered, to give a sample of 30 SIPs from schemes, proportionate to the different sizes of scheme which operate in the UK pensions industry.  You can read more about how we undertook this work in the report’s methodology.

About UKSIF

The UK Sustainable Investment and Finance Association (UKSIF) is the membership organisation for those in the finance industry committed to growing sustainable and responsible finance in the UK. Our vision is a fair, inclusive and sustainable financial system that works for the benefit of society and the environment. UKSIF was created in 1991 and has over 240 members and affiliates institutional and retail fund managers, pension funds, banks, research providers, financial advisers, consultants and NGOs. Visit our website to find out more: www.uksif.org

Contact

Ben Nelmes – Head of Public Policy at UKSIF & the report’s author – ben.nelmes@uksif.org / 07557 374 491 / 020 7749 9951