The pensions industry has welcomed the government’s decision to push forward with climate reporting and assessment legislation, branding it a “major milestone”.

The new regulations, which are subject to parliamentary debate in the coming months, will affect all authorised master trusts and schemes with £5bn or more in assets from October 2021, under a phased approach.

Under the requirements, trustees of the schemes in scope must meet climate governance requirements, publish a Taskforce on Climate-related Financial Disclosures (TCFD) report, and include a link to the report in their annual report and accounts.

LCP partner and head of responsible investment, Claire Jones, said: "Today marks a major milestone in requiring pension schemes to wake up to the risks of climate change and effectively manage the risks it poses to members' pension benefits.

“Given the urgency of the climate crisis, the speed at which the government has brought forward legislation in this area is to be applauded. We now have the final regulations and statutory guidance that set out what large schemes need to do, so they can proceed with confidence in preparing for the new regime.”

Jones added that trustees would be relieved that there had been “few material changes” from the consultation drafts, with most of these changes being in response to “practical concerns” raised during the consultation.

AXA Investment Managers solutions strategist, Bruno Bamberger, welcomed the guidance, calling climate risk and cashflow negativity “the two greatest challenges UK pension schemes currently face”, though he acknowledged that quantifying these risks was “a challenging task”.

Hymans Robertson head of responsible investment, Simon Jones, was similarly positive, stating: “We welcome the considerable efforts the Department for Work and Pensions (DWP) has made to create legislation and guidance that recognises the important role UK pension schemes need to play in combatting climate risk, and in supporting the UK government in its ambitious, legally binding climate targets.

“It is evident the DWP has considered a diverse range of stakeholder feedback, and we are pleased with the majority of amendments made to the draft regulations which seek to clarify and simplify, and which include a number of our own suggestions.”

While the response to the news was mainly positive, industry commentators noted that it was of paramount importance that scheme trustees take notice of the changes and be prepared to act.

Barnett Waddingham policy & strategy lead, Amanda Latham, said: “New climate regulations for pension schemes are coming in thick and fast, and pension schemes have no choice but to sit up and take notice. If the UK’s legal obligation to achieve a net-zero economy by 2050 wasn’t enough, the TCFD shines a spotlight on pension trustees, who are being urged to pick up the pace and act collaboratively.

“There is huge consumer demand for greener investment decisions, and the scale of the pensions industry means it’s perfectly placed to support the transition to a more resilient, fairer, and lower-carbon economy. For those that choose not to act, the consequences will be notable – both on the bottom line, and on our global environment.”

Explaining how the changes might initially make an impact, Aegon head of pensions, Kate Smith, commented: “The first wave of schemes is likely to face significant challenges as not all the jigsaw pieces are currently in place, as the FCA has still to consult on proposals to force investment fund managers to provide the necessary data to trustees.

“The guidance therefore recognises that there may be many data gaps in the first year’s climate risk disclosures, so trustees will be expected to carry out scenario analysis and calculate the metrics ‘as far as they are able’. The first climate risk reports are likely to be a ‘work in progress’ with the first wave acting as guinea pigs as trustees rise to the challenge and TCFD reports improve and evolve.”

Hymans Robertson head of responsible investment, Simon Jones, pointed out that delaying implementation of some proposed elements of schemes’ new responsibilities was a major positive for trustees.

He explained: “Of note is the deferral by one year of the requirement for trustees to gather and report on Scope 3 emissions data. The need to disclose more comprehensive emissions data from the second year of the new requirements being in place clearly places the financial services industry on notice that pension funds require this information, but gives additional time for data providers to enhance and finalise their Scope 3 data reporting capabilities.”

Looking at the regulations as a whole, Jones said he was “encouraged by the DWP’s message that climate change is one of many wider environmental, social and governance factors (ESG) that trustees should be considering”, arguing that “trustees need to continue to ensure that they address other ESG issues”.

He concluded: “Climate risk and opportunities that will arise through the transition to a low carbon economy continue to evolve. This legislation builds in a degree of pragmatism and recognition that individual schemes are best placed to assess their own climate positions.

“The inclusion of a review of this legislation and guidance in 2023 gives the DWP opportunity to reflect on the efficacy of its proposition. Retaining a degree of flexibility as data and protocols evolve, and addressing any initial material concerns from participants, is an important component of generating the best long-term outcome.”

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