PART 1 – Climate Risk Governance and Reporting for Pension Schemes – things are heating up…

21 / 09 / 2020

In late August 2020 the Department for Work and Pensions (“DWP“) launched a new consultation seeking industry views on proposals effective 1 October 2021, to require trustees of (i) larger occupational schemes; (ii) authorised master trusts; and (iii) schemes providing collective money purchase benefits to have effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks.

The DWP is also seeking views on whether schemes should report on these risks and opportunities in line with the recommendations of the international industry-led Task Force on Climate-related Financial Disclosures (TCFD) by the end of 2022. More specifically the Consultation proposes:

  • trustees should carry out scenario analysis, calculate metrics and report against trustee-set targets as far as they are able. This should be done at least once every scheme year. It is proposed that governance, strategy and risk management activities should be considered to be ongoing activities;
  • trustees obtain data from their asset managers, and in turn from investment firms, on emissions and other characteristics of their investments that they wish to quantify, as far as they are able;
  • calculate and publish at least one metric that they use to measure, monitor and manage the climate-related risks and opportunities of the scheme. The metric could either be emissions-based or non emissions-based. Trustees would be able to select the metrics they use from a range set out in statutory guidance rather than prescribed by regulations;
  • set at least one target for one of the metrics that they choose to publish; and
  • underlying data for metrics and targets should be obtained and calculated, and performance against targets should be measured, at least quarterly.

Which schemes are in scope?

The DWP is targeting a phased approach – initially, the requirements would apply to occupational schemes with more than £5bn in assets (on and from 1 October 2021). Those schemes holding more than £1bn will come into scope from 1 October 2022 onwards with the potential for the requirements to extend to all schemes in 2024.

The DWP have deliberately excluded smaller schemes for the time being – this is primarily to alleviate the burden whilst the UK recovers from the severe disruption caused by the COVID-19 pandemic. However, the Consultation expressly states that delaying decisive action on climate risk will only expose sponsoring employers, trustees and pension savers to potential turbulence in the future – rolling this out to all schemes in due course seems inevitable.

The Pension Schemes Bill 2019 – 21

The Consultation runs until 7 October 2020. The proposals will inevitably be subject to change but it is unlikely that significant amendments will be made. Building on expectations set out in the government’s Green Finance Strategy, amendments were made to the Pension Schemes Bill during its passage through the House of Lords. It now includes powers which will enable the DWP to:

  • impose requirements on scheme trustees with a view to securing that there is effective governance of the scheme with respect to the effects of climate change;
  • requiring information relating to the effects of climate change on the scheme to be published; and
  • ensuring compliance with the requirements above.

Ministers have made clear that the provisions are intended to allow governance processes and disclosures aligned with the TCFD recommendations to be mandated. Furthermore, the Consultation states that it “is about when and how schemes should be required to adopt these enhanced governance requirements and report in line with the TCFD recommendations.

Other Key Proposals

Disclosure – trustees of affected schemes would be required to publish their TCFD report on a website as well as informing members via annual benefit statements. There are also reporting requirements as far as the Pensions Regulator is concerned.

Industry Guidance and the Paris Agreement – trustees will be required to draw on non-statutory guidance from the Pensions Climate Risk Industry Group to help fulfil these new requirements. The Consultation states that it does not cover reporting the implied temperature rise of a portfolio in line with the Paris Agreement 2015, as further work needs to be done to translate what the Paris Agreement commitments mean for businesses and investors in practice. The DWP plans to consult on Paris Agreement alignment in the near future.

Penalties – failure to publish a TCFD report could result in a minimum mandatory penalty of £2,500, and that the maximum fine for breach of any of the other requirements would not exceed £5,000 for an individual trustee, or £50,000 for a corporate trustee. This will be overseen by the Pensions Regulator.

WB Comment

In launching the Consultation, Pensions Minister, Guy Opperman stated:

We need to respond urgently to the risks of climate change, especially those affecting the financial sector and wider economy, on which so much rests…..To enable this change, I propose embedding in pensions law the recommendations of the TCFD. I make no excuse for the work this entails – we lead the way and I expect others to follow.

The government is determined to bolster governance and reporting around climate change risk. Whilst the larger schemes will already have this on their radar, many smaller schemes will not have had significant engagement in this area. A full roll-out across all schemes in 2024 is not that far away and trustee boards should begin to engage with their advisers on what the new regime could mean for them and how the transition should be managed.

The timescale for implementation is ambitious but the government appears determined to shift pension schemes towards the low carbon economy.