Pensions industry happy to be 'breaking new ground' with climate risk changes

Prominent figures from the pensions industry have expressed relief that the government has “broken new ground” with its adoption of recommendations from the Taskforce for Climate-related Financial Disclosures (TCFD).

In its response to last year’s Taking Action on Climate Risk consultation, the government published a new consultation on draft regulations and statutory guidance to implement the requirements.

It confirmed that occupational pension schemes with more than £5bn in assets and authorised master trusts would need to have effective governance, strategy, risk management, and accompanying metrics and targets for the assessment and management of climate risks and opportunities in place from October 2021.

ShareAction UK policy manager, Rachel Haworth, said: “The Department for Work and Pensions (DWP) has broken new and important ground in developing detailed regulations and guidance in this area. It is critical for pension funds to take a forward-focused approach to managing climate risk to safeguard both the financial interests of their beneficiaries and the stability of the wider world in which they live.

“Moreover, we believe this work paved the way for the UK government’s subsequent announcement of its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023.”

Haworth’s sentiment was echoed by Lincoln Pensions managing director, Michael Bushnell, who said: “Climate change will affect most, if not all sponsors, so the recognition by the DWP that trustees should consider how it will impact their covenant is an important development.”

Barnett Waddingham policy and strategy lead, Amanda Latham, noted that “acting collaboratively as an industry to manage exposure to climate change risks and take advantage of greener investment opportunities” would “speed up the transition to a more resilient, fairer, and lower carbon economy, ultimately improving quality of life and rebuilding livelihoods”.

As well as approval for taking the step forward of bringing climate change-related regulation to the industry, most respondents were pleased about the form of the changes.

LCP head of responsible investment, Claire Jones, said: “The headline changes that DWP has made in response to last year’s consultation suggests that it has struck an appropriate balance between addressing the practical concerns that we and others had identified and setting suitably high expectations for trustees’ climate action.”

PLSA deputy director for policy, Joe Dabrowski, added: “The TCFD guidance published today provides a very helpful framework for pension trustees to evaluate climate risk in their portfolios. We are pleased the government has listened to our concerns with respect to the frequency with which trustees should conduct their scenario testing.

“This strikes the right balance between encouraging trustees to understand, report and address the risks in their portfolios, without making the requirements too burdensome.”

Some commentators offered advice for pension professionals, with Jones cautioning trustees of smaller schemes that “whilst the new requirements do not yet apply to them, the government made it clear last August that all trustees are expected to take action to address climate risk”.

She continued: “The DWP had already said it would consider in 2024 whether to extend the requirements to smaller schemes and today it has brought forward that review to 2023. In the meantime, trustees of smaller schemes can look to the requirements for large schemes as an indication of best practice on climate risk.”

Similarly, Aegon head of pensions, Kate Smith, said: “Although for most schemes affected in the first phase, they will be publishing their TCFD statement next year, the work begins now. The amount of work involved shouldn’t be underestimated.

“Trustees will need to begin widening their governance framework to ensure they are ready to report next year. The guidance published by the DWP will go some way in helping trustees comply with the new requirements, but specialist advice in this extremely important area is going to be essential.”

Finally, Haworth called on the DWP and the wider industry to speed up its work in combatting climate change in recognition of the danger posed by the crisis.

Haworth explained: “This is a positive start, ensuring financial markets are pricing in climate-related financial risks. However, climate change is a systemic challenge which individual investors will struggle to manage on a portfolio-by-portfolio basis.

“Rather, economic transformation is required. DWP states that it has explored the methodologies available for measuring the climate impacts of pension fund portfolios but concluded that more work is required before these can be implemented. We call on DWP and the pensions industry to accelerate this work in line with the urgency and scale of the climate crisis.”

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