The government has announced that it is considering whether to update the current rules surrounding pension schemes' sustainability reporting, confirming that it will review the 2021 Climate Change Reporting Regulations this year as part of this.

The update was one of a number of measures announced by the government today, as it shared three consultations, which form part of the first phase of its work to modernise the UK’s sustainable finance framework.

This included a consultation on the draft UK Sustainability Reporting Standards (SRS), based on the International Sustainability Standards Board standards, and a consultation on options to take forward climate-related transition plan requirements in order to provide the market with credible and decision-useful information.

The work is expected to support the 2024 Mansion House package, as well as the government's previous commitment to mandating “UK-regulated financial institutions (including banks, asset managers, pension funds and insurers) and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement”.

The consultations confirmed that, as part of this work, the Department for Work and Pensions (DWP) is to undertake a review of the 2021 Occupational Pension Schemes (Climate Change, Governance and Reporting) Regulations this year, building on evidence provided by The Pensions Regulator (TPR).

These regulations required trustees of larger occupational pension schemes and authorised master trusts to meet climate governance requirements, publish a Task Force on Climate-related Financial Disclosures (TCFD) report, and include a link to the report in their annual report and accounts by the end of 2022.

"DWP considers the review to be a natural place from which to consider the impact of the current climate disclosure regime and potential next steps on climate change-related reports," it stated.

The government confirmed that, as part of the review, it will also consider the role of UK SRS in reporting on climate-related matters by pension schemes, with stakeholders encouraged to provide feedback to DWP to inform this work.

In addition to the TCFD review, DWP has asked TPR to assess the practicalities of transition plans for pension schemes.

It confirmed that the regulator is convening an industry working group involving sector stakeholders and some of the largest occupational pension schemes, with the findings from this work to be shared with the DWP later this year.

Pension schemes are exposed to climate-related risks, regardless of their size, the nature of their investments, or their time horizons.

The government's transition consultation also revealed that it is currently considering whether to redefine the scope of entities under any future transition plan requirement, stressing the need for transition plan requirements to be considered holistically against the backdrop of the government’s broader climate announcements.

However, the government said it was "clear" that it wants any future requirements to be proportionate and that the focus will be on economically significant entities, including pension funds, where there is likely a significant investor and public interest.

"As a result, small to medium-sized companies are not envisaged as being within the scope of any future requirements set by the government," it confirmed.

It also emphasised the need to ensure the scope of any future requirements does not impact the attractiveness of the UK as a listing destination by creating additional or unnecessary burdens for firms looking to go public.

Industry experts have welcomed the consultations, with UK Sustainable Investment and Finance Association (UKSIF) CEO, James Alexander, stating: "We welcome the government's commitment to bringing forward the consultation on climate transition plans for banks and large companies.

“These are essential for enhancing growth and global competitiveness as the UK and other countries decarbonise. They can also give industry leaders valuable insights into their business’s long-term resilience, guiding strategic thinking.

“Further dialogue between the government and industry on the UK Sustainability Reporting Standards, which would align the country with international reporting practices, is also very encouraging.

“We look forward to ministers taking forward these commitments, which will help future-proof our economy over the coming years."

Adding to this, LCP partner and head of responsible investment, Claire Jones, said: “We are pleased that the government is starting to move forward with its manifesto commitment to require certain UK companies and financial institutions to develop and implement credible climate transition plans.

"Today’s consultation launch is an important first step. A requirement to prepare and implement transition plans could help align the UK corporate and financial sectors with the UK’s commitment to reach net-zero emissions by 2050.

"This is important for our pension scheme clients because, by limiting climate change, it will help to prevent damage to the economy and financial markets on which their members’ pensions depend."

However, Jones argued that it's "really important that the new requirements get the balance right between enabling and encouraging actions from companies and financial institutions to reduce emissions while also respecting their legal duties to shareholders and savers and not creating a disproportionate reporting burden".

---