The UK government today published draft climate risk reporting and governance rules for pension funds that are in line with the main thrust of proposals outlined last year but incorporate some changes in response to feedback.
Its consultation on the proposed rules comes after the Chancellor in November announced plans to roll out mandatory climate reporting requirements across the UK economy by 2025, with a significant proportion in place by 2023. The DWP had by then already proposed mandatory action by pension funds.
Guy Opperman, minister for pensions and financial inclusion, said: “Trustees can be sure that the UK-regulated organisations on which they depend not only for data and information but also day-to-day management of climate change risk will be subject to the same obligations and requirements.”
For larger pension schemes today’s release from the Department for Work and Pensions (DWP) “is confirmation of what they knew was coming down the tracks,” said Claire Jones, head of responsible investment at LCP.
“By 1 October 2021 (or 1 October 2022 depending on their size), they will need to have a system in place to identify, assess and manage climate-related risks and opportunities and be preparing to publish annual [Task Force on Climate-related Financial Disclosure (TCFD)] reports.”
In a change to what it set out last year, however, the DWP today revealed it had brought forward to the second half of 2023 the start date for its review of whether to extend the new requirements to smaller schemes not yet in scope (broadly those with assets less than £1bn). This had been scheduled for 2024.
Stuart O’Brien, partner at law firm Sackers, said the DWP did not “soften on the substance” although some helpful adjustments based on consultation feedback had been made.
“Particularly welcome is the decision to take buy-ins out of scope for the £5bn and £1bn thresholds of schemes in scope,” he said. “This will be helpful for very mature de-risked schemes.
“Also welcome is the decision to require that trustees conduct scenario analysis once every three years rather than annually, although schemes must still do their first scenario analysis in the first year that the regulations apply to them.”
A new requirement is for trustees to have an “appropriate degree of knowledge and understanding of the principles relating to the identification, assessment and management of climate change risks and opportunities”.
“The policy intent here is that trustees understand the outputs of activities such as conducting scenario analysis and calculating emissions-based metrics and can incorporate such activities into their new climate change risk management processes,” said the DWP.
It added that it was not saying trustees must be experts on climate change or its financial implications, nor requiring that they be able to carry out highly technical climate risk assessments themselves.
Sackers’ O’Brien noted that with today’s publications there is much more detail about the expectations on schemes to carry out scenario analysis, monitor metrics and set targets.
On metrics, the DWP is consulting on requiring trustees to select at least two emissions-based metrics, one an absolute measure and one an intensity-based measure.
According to the draft statutory guidance, when reporting total greenhouse gas emissions and carbon footprint, trustees should set out the Scope 1 and 2 emissions of assets separately from the Scope 3 emissions of assets for their defined benefit (DB) scheme, DB section and defined contributin (DC) default funds as appropriate.
Trustees must also select and report one additional climate change metric, such as a portfolio alignment metric or climate value at risk measure, according to the guidance.
Trustees must also set targets for the metrics they are monitoring, although O’Brien said the draft regulations require performance against targets to be measured annually rather than quarterly as had originally been proposed.
The statutory guidance also makes clear that for DB schemes, trustees’ scenario analysis must, “as far as they are able”, consider the sponsor covenant.
Michael Bushnell, managing director of Lincoln Pensions, said: “Climate change will affect most, if not all sponsors, so today’s recognition by the DWP that trustees should consider how it will impact their covenant is an important development.
“Although trustees have rightly raised concerns about additional costs, the covenant is a scheme’s most material asset, so understanding it should be the focus of any pension strategy.”
“The best endeavours approach to disclosure also recognises that climate risk management is a fast developing science with the quality of metrics improving all the time”
Joe Dabrowski, deputy director for policy at the PLSA
Joe Dabrowski, deputy director for policy at the PLSA, said the TCFD guidance that was published today “provides a very helpful framework for pension trustees to evaluate climate risk in their portfolios” and that the government’s adjustment to the frequency of required scenario analysis “strikes the right balance”.
“The best endeavours approach to disclosure also recognises that climate risk management is a fast developing science with the quality of metrics improving all the time; in such an environment it is sensible to encourage trustees to disclose and address the risks they can, rather than wait for data to be ‘perfect’,” he added.
The DWP is consulting on the draft regulations and guidance runs until 8 March, using powers it will be granted once the Pension Schemes Bill gains royal assent.
In tandem with the publication of the regulations guidance the final version of a guide developed by the Pensions Climate Risk Industry Group was released today. It is aimed at schemes of all sizes, including those not in scope of the regulations.