A consultation has been launched on draft non-statutory guidance for occupational pension scheme trustees on assessing, managing and reporting climate-related risks.

It is the work of a cross-government and industry group set up last summer by the Department for Work and Pensions, The Pensions Regulator and other government departments.

The Pensions Climate Risk Industry Group (PCRIG), as it was named, described the guide, as “structured sequentially based on the way a pension trustee board might typically approach decision-making”.

“The draft guide is designed to help trustees meet existing legal obligations to consider financially material factors in their investment decision making and provides suggestions on how to integrate the consideration of climate-related risks within trustee governance and risk management processes,” it said.

It uses the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Last month the government tabled amendments to the draft pension schemes bill, which, if passed, will reserve powers for it to require prescribed pension schemes to publish climate change-related risk information and to impose requirements with a view to securing that schemes are effectively governed with respect to the effects of climate change.

The TCFD is not name-checked in the amendments, but in the foreword to the consultation on the PCRIG’s climate risk guidance Guy Opperman, the pensions minister, said he was proposing “to take powers in the current Pension Schemes Bill to require climate change risk governance and TCFD reporting”.

“We will consult on these requirements later this year and issue further guidance on compliance with final regulations, as quickly as possible,” he wrote.

But he welcomed the PCRIG’s guidance and the consultation, indicating this was because “my expectation is that schemes do not need regulations in order to start actively managing their exposure to climate change in line with the Task Force recommendations and reporting on how they have done so.

”As more and more pension schemes move towards TCFD reporting voluntarily, it is absolutely imperative that trustees have the necessary skills and knowledge to follow the recommendations of the Task Force.”

Last year government announced an expectation that all listed companies and large asset owners, including occupational pension schemes, would disclose in line with the recommendations of the TCFD by 2022.

Earlier this month the Financial Conduct Authority proposed a new rule that would require commercial companies with a premium listing to make TCFD-informed disclosures “or explain why not”.

‘First of its kind’

Caroline Escott, member of the PCRIG and policy lead for investment and stewardship at the Pensions & Lifetime Savings Association, said climate change posed a systemic risk to nearly every sector and every business and that it was “vital that trustees have a clear framework when considering how to manage the potential impact of climate change on scheme member outcomes”.

She highlighted that the PCRIG’s proposed guidance “recognises the fact that most schemes will need appropriate support from their managers and consultants, offering practical tips and guidance for making schemes’ expectations on the consideration of climate risk clear to their investment service providers”.

The guide also touches on issues pertinent to defined benefit schemes, including how climate-related risks may impact employer covenant and approaches to scheme funding.

It recommends scenario analysis as “a helpful technique for trustees to assess their scheme’s resilience to different future outcomes”. Three scenarios are recommended: an orderly transition to a 2⁰C or lower scenario; an abrupt transition to a 2⁰C or lower scenario, and a “no transition, pathway to 4+⁰C scenario”.

Peter Uhlenbruch, of responsible investment campaign group ShareAction and a member of the PCRIG, said the guidance was “the first of its kind and the missing ingredient for trustees to make a real success of climate integration and reporting”.

“We expect this guidance to deliver tremendous practical value to UK trust-based schemes, many of whom, according to our own research remain at early stages of managing climate-related risks and opportunities,” he added.

“Future-proofing the billions of funds managed by these trustees against the unprecedented climate-related challenges that lie ahead is an enormous task, one that we hope this guidance will offer invaluable support. Now there’s really no excuse for dallying.”

“The guidance will help trustees meet their existing legal duties and respond to the rapidly increasing expectations from policy makers, regulators and scheme members”

Claire Jones, head of responsible investment at consultancy LCP and member of the PCRIG

Claire Jones, head of responsible investment at consultancy LCP and another member of the PCRIG, said: “While this latest guidance isn’t mandatory and is subject to consultation, it will help trustees meet their existing legal duties and respond to the rapidly increasing expectations from policy makers, regulators and scheme members.

“Some trustees may feel overwhelmed with the increasing amount of information in this area, but the quick start guide provides an accessible entry point for trustees and they should read it now.”

The consultation on the trustee guidance closes on 7 May 2020 and the PCRIG aims to publish final guidance this autumn.

A word from the chair

Stuart O’Brien, partner at law firm Sackers and chair of the PCRIG, said that although most trustees will have acknowledged the financial risk of climate-related risk for their pension schemes “so far few have developed concrete plans to quantify and address the risks of climate change or capitalise on the opportunities of the transition to a net zero carbon economy”.

“It is for that reason that we are providing new cross-industry guidance to help pension trustees meet their existing legal responsibilities.”

Speaking to IPE, he emphasised that the group was not formed to produce a compliance burden for trustees.

stuart o'brien

Stuart O’Brien, partner at Sackers and chair of the PCRIG

“The group was put together because there was a recognition that compliance requirements were hardening and trustees really needed some help, and it would be better to have help that is supported across the industry than lots of bits of guidance,” he said.

According to O’Brien, the guidance should not be seen as being about “how to do TCFD reporting”.

Flagging a “subtle distinction”, he said: “The point of the guidance is to take it a step back and explain how trustees might think about climate risk within their decision-making processes in a way that makes it easier for them to do a TCFD disclosure report if they wish to do so.”

It was also important to the group that the guide use language trustees are familiar with, he said.

“There’s no point writing a lot of guidance as if they’re picking stocks when they’re not,” he said. “We felt we should be writing guidance that pension trustees would pick up on, and this would be in familiar language and talking about familiar processes.”

“This is about trustees understanding risk in their own scheme, giving some suggestions as to how this might be done, and then them thinking about what they do with their strategy.

“It might be it involves no change, or that it shines a light on a risk the trustees weren’t previously aware of, or a magnitude or concentration of risk they weren’t aware of.”