Some employers may “strongly” resist providing certain climate risk-related information to trustees on the grounds of confidentiality, according to the Employer Covenant Practitioners Association (ECPA).
Responding to the pensions regulator’s consultation on guidance on governance and reporting of climate-related risks and opportunities, ECPA said it would welcome greater clarity as to how trustees and sponsors should report on climate-related risks and opportunities from a covenant perspective.
“This is critical in ensuring that climate-related risk is being managed in an integrated way,” it said.
The Pensions Regulator (TPR) has said it would be publishing further guidance about how trustees and their advisers could consider climate-related risks and opportunities as part of the covenant assessment.
In its consultation feedback, ECPA told TPR that it would be helpful to understand the extent to which it expected employers to be able to limit the amount of information that they provide to trustees on the grounds of confidentiality given the public nature of trustees’ reports.
“For some employers the impact of climate-related risks and opportunities on their covenant could be significant and require considerable investment to be made or significant strategic decisions to be taken,” said Andy Palmer, chair of the ECPA.
“The commercial sensitivities around these matters could be such that public disclosure would be strongly resisted.”
Not necessarily divestment
The ECPA also said it would be helpful for TPR to reiterate that targets set by trustees should be scheme-specific, “and not conflict with trustees’ fiduciary duties, or the investment policies stated in the Statement of Investment Principles”.
“An excessive focus on portfolio optimisation to meet targets at the expense of scheme objectives could be contrary to trustees’ fiduciary duty under trust law,” said Palmer.
“There is no expectation that trustees should set targets which require them to divest or invest in a given way, and the targets are not legally binding.”
At consultancy Redington, Paul Lee, head of stewardship and sustainable investment strategy, called for additional guidance for trustees on the considerations that should feed into setting targets, “to ensure this does not create a tick-box approach”.
“As an exercise we are currently undertaking across our client base, we believe it’s vital that targets are well thought out and integrated into a decision-making framework in order to be truly decision-useful,” Lee added.
Separately, he said it should be emphasised that risk mitigation following assessment of climate risk “does not have to come in the form of divestment or portfolio changes”.
“This may be short term and promote unintended consequences, such as limiting the ability of the real economy to make the required decarbonisation transition,” said Lee.
“Overall, we believe that the draft guidance strikes the right balance between encouraging ambitious governance standards and acknowledging the many challenges schemes face.”
Joe Dabrowski, deputy director policy at the PLSA
Joe Dabrowski, deputy director for policy at the pension fund industry association, said TPR’s draft guidance “strikes the right balance between encouraging ambitious governance standards and acknowledging the many challenges schemes face”.
He said the regulator had taken a “common sense approach” with its monetary penalities policy, which “should give trustees reassurance that enforcement action will be undertaken sensibly and will take into account the gaps in data available to investors and the rapidly evolving regulatory environment”.
The PLSA would, however, like to see some “further refinement or development” of the draft guidance, according to Dabrowski.
He mentioned further clarification of reporting expectations across different asset classes, guidance on use of qualitative scenario analysis, the impact of climate issues on covenant risk, and also ensuring that all elements of the information sought and the format in which it could be received “can be used purposefully and understood by regulators and scheme members alike”.