The government should make it mandatory for large companies and pension funds to report their exposure to climate change risks, a committee of MPs has said.

Current rules encourage short-term thinking while neglecting concerns such as sustainability, the Environmental Audit Committee (EAC) said. It recommended that new rules on climate change disclosure should be in place by 2022.

Institutional investors are sometimes confused about the extent of pension trustees’ duty to consider environmental risks, the MPs said.

The report urges the government to lay down in law the duty that pension funds and other large asset owners have to consider the long-term value of their investment. In light of this duty, institutional investors should be considering environmental risks, the committee said.

This is especially important given the long time horizons of pension funds’ investments and the huge sums of money involved, the committee said. UK pension funds manage trillions of pounds worth of assets.

Mary Creagh MP, chair of the Environmental Audit Committee, said: “We need to fix the incentives in our financial system that encourage short-term thinking. Long-term sustainability must be factored into financial decision making.

“Climate change poses financial risks to a range of investments – from food and farming, to infrastructure, construction and insurance liability. The low-carbon transition also presents exciting opportunities in clean energy, transport and tech that could benefit UK businesses.

“We want to see 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.”

The committee said pension savers should be given a greater opportunity to engage with decisions about where their money is invested.

The government should require fiduciaries to actively seek the views of their beneficiaries when producing statements of investment principles, the MPs said.

The recommendations come amid growing international momentum encouraging financial reporting on sustainability.

Rachel Howarth, senior policy officer at campaign group Share Action welcomed the report.

"Endemic short-termism in the UK pension and investment system poses huge risks to the financial and wider interests of individual savers," she said.

"We were particularly pleased to see the recommendation that climate risk reporting should apply equally to asset owners (such as pension funds) and their investment managers."