Proposed new regulation on climate change

New climate risk governance and reporting requirements are on the horizon for Trustees of larger pension schemes and potentially all schemes at a later date. The Department of Work and Pensions (DWP) is currently considering responses to the consultation, which closed on 7 October 2020, and is expected to consult further on regulations before they are laid before parliament next year.

Proposals include the use of metrics and targets for the assessment and management of climate risks and opportunities, along with additional disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

As well as integrating climate-related risks into their overall risk management, Trustees would be required to make more disclosures on a publicly available website. The requirements would come into force from 1 October 2021 for some schemes, and also include a requirement for a link to the most recent TCFD report in the Annual Report and Accounts. This does not leave Trustees with much time to get the right processes in place. The additional requirements proposed by the DWP are quite extensive with penalties incurred if they are not met.

Climate change is very much a hot topic at the moment. Trustees of defined contribution (DC) schemes are already required to publish an implementation statement alongside their Statement of Investment Principles which sets out how they have followed their environmental, social, and governance (ESG) policies, which includes climate change. DC schemes should publish this implementation statement once the Annual Report and Accounts have been signed from 1 October 2020, or by 1 October 2021 if earlier. Defined benefit schemes (DB) are also required to publish a similar implementation statement by 1 October 2021.

Scope and timing

A two-stage approach is proposed, with schemes of £5 billion or more in net assets, master trusts and collective money purchase schemes being required to have governance arrangements in place from 1 October 2021, and to publish a TCFD report within seven months of their first scheme year to end after 1 October 2021 or by 31 December 2022, whichever is earlier. This will extend to schemes with net assets of £1 billion or more a year later. This would mean that Trustees of all schemes should have published a TCFD report by 31 December 2023.

The proposed measures would be reviewed in 2024, to examine the emerging effects of the requirements and any unintended consequences, before determining how and when to extend to smaller pension schemes.

Proposed new requirements

Under the proposals, Trustees would be required to meet climate governance requirements which underpin the 11 recommendations of the TCFD, and to report on how they have done so. Accompanying statutory guidance would set out steps to achieve this. If Trustees diverge from this statutory guidance, they would need to be able to explain why.

Trustees would be required to identify, manage and assess climate-related risks and opportunities that will have an effect on the investment (and for DB schemes the funding strategy) of the scheme over the short, medium and long term. The requirements are split into the following core elements: governance, strategy, risk management, and, metrics and activities. Full details can be found in the consultation document.

A couple of the more notable requirements

• At least annually, as far as they are able, Trustees would be required to assess the resilience of the scheme’s assets, liabilities and investment strategy and, in the case of DB schemes, funding strategy to climate-related risks in at least two climate-related scenarios, including at least one scenario that represents an eventual global average temperature rise of between 1.5 and 2°C on pre-industrial levels.
• At least quarterly, Trustees would be required to calculate at least one appropriate greenhouse gas emissions (GHG) based metric (for example, Weighted Average Carbon Intensity) and at least one other non-emissions-based metric. Annually, Trustees would be required to set at least one target to manage climate-related risks for one of the metrics calculated, against which performance should be measured quarterly.

Trustees’ reporting requirements

• Publish their TCFD report in full on a publicly available website.
• Include a website link to the most recent TCFD report in the Annual Report and Accounts. Trustees could include a high-level summary of their TCFD report in their Annual Report, alongside the website link, but this will not be a regulatory requirement.
• Notify members in the annual benefit statement of the website address where they can locate the full TCFD report.
• Include the website address for the full TCFD report in their scheme return to the Pensions Regulator (along with the location of their published Statement of Investment Principles (SIP), Implementation Statement and excerpts of the Chair’s Statement).

TCFD material linked to within the Annual Report will constitute Other Information, therefore, whilst it would not be audited, it would be subject to consideration by the auditor. The consultation suggests that auditors would require a copy of the original TCFD material prior to its publication on the entity’s website in order to be able to fulfil their responsibilities in relation to Other Information.