Trustees will be aware of the requirements for reporting in connection with climate change considerations:

  • In 2021, the DWP introduced new requirements relating to reporting in line with the Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations. The aim is to improve the quality of governance and the level of action by trustees in identifying, assessing and managing climate risks.
  • The Climate Change Governance and Reporting Regulations are applicable to large schemes (assets: >£5bn) from 1 October 2021 and medium sized schemes (£1bn – £5bn) from 1 October 2022, with trustees expected to publish a TCFD report within seven months of the end of the scheme year.

Notably, tPR recently published a climate adaptation report outlining the risks of climate change that are of most relevance to pension schemes.  The Regulator also expressed concern that pension schemes are not paying enough attention to climate-related risks and opportunities; according to its own survey only 30% of all schemes and 41% of large schemes had significantly considered the sponsoring employer’s exposure to climate-related factors.

In responding to the new reporting requirements, the primary focus of trustees’ attention will necessarily be on the implications of a scheme’s investment policy. However, trustees should not overlook the requirement to report the implications of climate change on the scheme’s own sponsor.

We have found that as an initial screen, a standard framework of questions is helpful in putting trustees in a position to respond to the new requirements. This initial assessment can then be used to underpin a forward-looking scenario analysis which considers the impact on the sponsoring employer under various temperature change scenarios. In this way, the climate change analysis sits alongside the regular covenant assessment work and can be integrated with the funding and investment strategies. Moreover, the initial analysis provides a baseline against which to measure changes over time.

The standard question framework would typically include the following:

  • How exposed is the sponsor’s sector to climate change over a short, medium and longer timeframe?
  • How is the sponsor responding to that exposure?
  • Does that response involve a fundamental change in the sponsor’s business, whether in terms of changes to the business model or the cost of doing business?
  • How does the sponsor’s response compare to other companies in the same sector?
  • What is the timescale for the targets and initiatives of the sponsor?
  • To what extent is there a correlation between the exposure to climate change of the scheme and the sponsor?
  • How is the sponsor regarded by the various climate rating agencies?

In our experience, the answers to some of the above questions will also require a degree of interaction with and the provision of information from the sponsor beyond the sponsor’s own public disclosures. As such, the information flow between sponsor and trustees is of critical importance.

The rules around climate change reporting will continue to evolve in the coming years. However, if trustees can adopt a practical and systematic approach from the beginning they will be well placed to understand and assess the risks to which they are exposed.

Hamish Dalgarno, Associate – 020 7337 4113 (hdalgarno@penfida.co.uk)