'Piece of the puzzle missing' on climate reporting proposals

Less detailed but more focused reporting and a broader focus on the transitional risks around climate change are needed in the government's proposals for Paris-aligned climate reporting, industry organisations have said.

The government launched a consultation on plans to require pension trustees to calculate and disclose a portfolio alignment metric setting out the extent to which their investments are aligned with the Paris Agreement goals in October 2021.

In its response, the Association of Consulting Actuaries (ACA) said that whilst it was supportive of the new mandatory portfolio alignment metric as tool in managing forward-looking climate risk, there could be value in requiring less reporting detail.

In particular, the group recommended that the other additional metrics included in the proposals fall under a 'should' criteria, rather than 'must'.

The ACA also encouraged the Department for Work and Pensions (DWP) to consider an interim provision whereby schemes that fall under the regulations from 1 October 2022 can choose to report either a portfolio alignment metric or an additional metric in their TCFD report for the scheme year ending after 1 October 2022.

In addition to this, it recommended that the required detail on environmental, social and governance (ESG) and stewardship policies be contained in a supplementary statement to the Statement of Investment Principles (SIP), to allow the main body of SIPs to focus on investment objectives and strategy.

ACA Investment Committee lead, Vanessa Hodge, also suggested that there would be value, particularly for members, for implementation statements (IS) to be "more focused and less detailed".

In light of this, the association recommended that the government "rethink" the guidance around the level of disclosure required on in the IS when reporting on significant votes.

Broader concerns around the scope and focus of the proposals were also raised by ACA Climate Risk Group lead, Stewart Hastie, who argued that the guidance should "emphasise the importance of the actions being taken within the underlying assets to de-carbonise rather than just whether a long-term net-zero target has been announced."

Similar concerns were raised by Isio, which warned that the DWP may have “missed a vital piece of the puzzle” by focusing closely on decarbonisation and transition risk.

Isio head of ESG research, Cadi Thomas, commented: “We are fully supportive of the DWP's latest climate consultation which signals a step-wise change in thinking for pension schemes and tracks increasingly ambitious industry momentum; calling for trustees to measure and report against efforts to limit the global average temperature increase to 1.5°C using the portfolio alignment metric.

“However, we note that the current focus remains on decarbonisation and transition risk. We feel greater attention on adaptation and physical risk is required, in alignment with the programme set out in the Glasgow Pact to advance the global goal on adaptation.

“Given this is the missing piece of the puzzle in an industry wide response to climate change, any evolutions in TCFD guidance could consider turning their attention to physical resilience.”

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