The UK government is being urged to scrap climate change disclosure rules for occupational pension schemes and instead direct pension funds to transition planning.
According to Bobby Riddaway, managing director of professional trustee firm HS Trustees and the chair of the Trustee Sustainability Working Group, requirements for climate change reporting and implementation statements – a pension fund’s account of its investment and responsible investment activity over the previous year – are directing time and money to the wrong areas.
In an op-ed circulated to UK pensions media outlets this month, he said current spending on investment consultants for this reporting – based on the Task Force for Climate-related Financial Disclosures (TCFD) framework – was conservatively estimated to be in the range of £30m (€35m) per annum, and that this money could be better spent on getting more pension fund capital into energy transition investments.
“The pensions industry often talks as if sustainability expertise is unlimited,” Riddaway wrote. “It isn’t.
“There is a relatively small group of sustainability specialists across pension funds, consultants, fiduciary managers and asset managers. These individuals are already heavily stretched. Imagine what could happen if even half of those resources were redirected.”
Riddaway has previously argued that TCFD reporting requirements should be scrapped and that the focus should instead switch to transition plans, and he is now seeking to up the ante on the back of work done by individuals in the Transition Plan Working Group (TPWG).
The TPWG was appointed last year by The Pensions Regulator (TPR) and held its final meeting in January. Some in the group have asked TPR, which produced a report for the government, to develop a capital allocation-oriented transition planning code instead of focusing on a template for disclosing a transition plan.
“I’ve spent the past four to five months making sure as many people as possible know about the transition planning code,” Riddaway told IPE. “We’re shouting about this as loud as we can and just trying to get the message into government.”
Last year the Department for Work and Pensions said it would be reviewing the regulations for pension schemes’ TCFD reporting, but it has yet to announce anything. Pensions UK, meanwhile, has accused the government of causing confusion among pension schemes as regards its transition plan policy.
FCA simplification proposal raises concerns
In a separate TCFD reporting-related proposal, the UK asset management regulator has set out plans to remove public TCFD product-level reporting requirements, replacing them with simpler, more targeted information.
Asset managers would still need to provide a firm-level TCFD report.
The Financial Conduct Authority (FCA) has said the intention behind the proposals was to ensure that retail and institutional investors got the right information based on their specific needs, while reducing “undue burden” on asset managers.
It said the proposals could save investment firms around £20m (€23m) a year.
Asset manager and asset owner-focused feedback has been broadly supportive of the intent behind the proposals, although the Principles for Responsible Investment has warned that the proposed removal of product-level reporting risked “lowering market standards and consistency across climate-related disclosures”.
It said the FCA should retain a streamlined regime rather than eliminate product-level reporting entirely.
Investment consultants, meanwhile, have raised concerns that the FCA’s proposals may make it harder for their asset owner clients to consistently obtain the climate-related information they need from asset managers.
In its feedback to the FCA, the Investment Consultants Sustainability Working Group (ICSWG) also said that asset owners needed more metrics for their regulatory climate reporting than the ones the FCA had suggested asset managers should be required to provide.
Asset owners also needed information to manage climate-related risks, not just to satisfy their own climate-related financial disclosure obligations, it said.
“It does feel as though the proposals go somewhat against the direction of travel”
Claire Jones, head of responsible investment at LCP – a member of the ICSWG that also made its own, separate submission to the FCA – told IPE that the key question was if, and how, the FCA’s proposals change asset manager behaviour in practice.
“It might be that we’ve reached a certain stage in the maturity of climate metrics reporting that managers will continue to report existing metrics and expand that over time, and the FCA rules won’t have a great deal of impact on that,” she said. “But it’s hard to say at this stage.
“It does feel as though the proposals go somewhat against the direction of travel in the sense that they are too grounded in mandatory reporting requirements and less in the good practice risk management needs that trustees have.”
The Investment Association (IA) said asset managers would provide additional metrics, “to the best of their efforts”, if requested by an institutional client, but that the FCA should set out clear boundaries in case the new rules resulted in firms producing more tailored on-demand reporting for asset owners. This was because the associated costs were likely to be higher than the original rules, it said.
Separately, the IA welcomed that asset managers would be encouraged – through guidance rather than a rule – to provide a broader suite of metrics if “reasonably required” by the institutional client for their reporting.
“The standardised and comparable GHG emissions required by FCA’s proposals can be framed as a starting point for deeper dialogue with clients on how wider climate risks and opportunities are managed within their investment,” it said.
The FCA’s consultation was open until 13 July. The regulator said it was aiming to finalise and implement the rule change in the autumn.
