PRAG guidance on TCFD reporting

The Pensions Research Accounting Group (PRAG) has published guidance to help preparers of annual reports with the new Task Force on Climate-related Financial Disclosures (TCFD) reporting requirements which came into effect from 1 October 2021 for certain schemes.

The guidance also contains a summary of the requirements for Implementation Statements and on the requirements for Environmental Social and Governance (ESG) factors and stewardship disclosures that are required in pension scheme annual reports.

Key highlights

TCFD reporting

When is it required?

• Schemes with assets of £5bn or more on the first scheme year-end date to fall on or after 1 March 2020 must meet the climate change governance requirements. This then applies for the current scheme year from 1 October 2021 to the end of that scheme year (unless audited accounts have not been obtained in respect of that scheme year, in which case from the date they are obtained).  So, for a £5bn scheme with a 31 March year-end, the first applicable year-end would-be 31 March 2022. The TCFD report will need to be within seven months of the end of the scheme year which is underway on 1 October 2021.
• Schemes with £1bn or more assets have an additional twelve months to comply.
• A review of the requirements for smaller schemes (under £1bn assets) will take place in the second half of 2023.

What is required?

• Trustees must, on an ongoing basis, identify and assess climate-related risks and opportunities which they consider will have an effect on the scheme’s governance, investment strategy and funding strategy (the latter where applicable).
• Trustees must undertake scenario analysis in at least two scenarios where there is an increase in the global average temperature, one of which must be within the range of 1.5 and 2 degrees Celsius above pre-industrial levels. The scenario analysis must be undertaken in the first scheme year in respect of which the requirements apply, and then every three years thereafter.
• Trustees must select a minimum of one metric which gives the total greenhouse gas emissions of the scheme’s assets (“absolute emissions metric”); one metric which gives the total carbon dioxide emissions per unit of currency invested by the scheme (“emissions intensity metric”); and one other climate change metric. The PRAG guidance provides a useful example of such metrics can be disclosed.
• Trustees must use the metrics they have calculated to identify and assess the climate-related risks and opportunities which are relevant to the scheme. Climate-related risks fall into two major categories: (1) risks related to the transition to a lower-carbon economy and (2) risks related to the physical impacts of climate change and the consequent financial implications. Climate-related opportunities may arise from efforts to mitigate and adapt to climate change, for example, through resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets.
• The TCFD report will need to be published on a publicly available website and a link to the report must be included in the pension scheme’s annual report. The DWP has also indicated in its guidance that it would be appropriate for the link being accompanied by a short summary of the TCFD report in the annual report and has provided suggestions for what this summary could include by way of best practice.
• Members must be notified of the report either in their annual benefit statements, or via the scheme funding statement depending on the type of scheme.
• In the annual scheme return to the Pensions Regulator, Trustees must provide the web address where the TCFD is published, together with the website location for the Statement of Investment Principles and Implementation Statement.

Implementation Statements and ESG and stewardship disclosure requirements in pension scheme annual reports

The PRAG guidance also includes a useful reminder of the requirements for Implementation Statements and a summary of the investment disclosures that must be included in the annual report which are set out in the addendum to the Statement of Recommended Practice that was published by PRAG in February 2021.

What you need to do

The largest schemes for whom the TCFD reporting regulations came into force on 1 October 2021 should already be well advanced in their preparations for TCFD reporting, but those schemes that will impacted from 1 October 2022 should begin preparing if they have not done so already.

The availability of data sources and best practice will clearly evolve over time, but Trustees should make themselves familiar with the requirements and what they mean for their scheme. An action plan should be prepared which identifies where assistance is required and which advisor will need to help in each area.

To discuss this further, please contact Shona Harvie or your usual Crowe contact.