TCFD requirements for pension schemes

Stuart O’Brien takes a look at the TCFD requirements facing pension schemes

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Stuart O'Brien
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Stuart O'Brien

ESG and climate change are increasingly under the spotlight for pension schemes and continue to be a key focus for trustees.

A raft of new climate reporting obligations were introduced in 2021 under the Pension Schemes Act 2021. The new requirements are being phased in, with larger schemes whose net assets are £5bn or more and master trusts already in compliance. Schemes with £1bn or more of assets will be in scope from 1 October 2022. Trustees of schemes in scope are required to put in place appropriate governance arrangements to manage climate-related risks and to produce and publish a report on how they have done so (the report).

Background

In 2017, the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations established a set of 11 "clear, comparable, and consistent" disclosures through which an organisation might identify, manage and disclose its exposure to climate-related financial risks and opportunities.

In 2019 the UK government set out an expectation in its green finance strategy for all listed companies and large asset owners to be disclosing in line with the TCFD recommendations by 2022. Making good on this ambition, in July 2021, the Department for Work and Pensions (DWP) published  the Occupation Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 together with statutory guidance on improving climate change risk, governance and reporting, in line with TCFD recommendations. The regulations came into force on 1 October 2021. In practice, meaningful disclosures on climate will not be possible without trustees undertaking certain governance activities, and for the first time the regulations not only tell affected trustees what they must disclose on ESG matters, but also prescribe specific actions that must be taken first.

TCFD recommendations

The TCFD recommendations can be considered in four areas, as applicable, to pension trustees as follows:

Requirements under the regulations

Trustees must:

Governance

  • Establish and maintain, on an ongoing basis, oversight of the climate-related risks and opportunities which are relevant to the scheme.
  • Establish and maintain processes for the purpose of satisfying themselves that persons undertaking governance activities on their behalf (and/or who advise or assist the trustee in respect of governance), are taking adequate steps to identify, assess and manage any climate-related risks and opportunities which are relevant to the to the scheme.

Strategy

  • Identify and assess, on an ongoing basis, the impact of climate-related risks and opportunities which they consider will have an effect over the short, medium and long term on the scheme's investment strategy.

Scenario analysis

  • As far as they are able, undertake scenario analysis assessing the impact on the scheme's assets and liabilities, the resilience of the scheme's investment strategy for at least two scenarios.

Risk management

  • Establish and maintain, on an ongoing basis, processes for identifying, assessing and effectively managing climate-related risks which are relevant to the scheme and integrate them into the trustees' overall risk management of the scheme.

Metrics and targets

  • Select certain climate-related metrics to monitor and report on an annual basis. The current requirement is that such metrics should include at least one absolute emissions metric and one emissions intensity metric, as well as one additional climate change metric. However, amendments to the regulations proposed by the DWP would require trustees to additionally obtain and report on a fourth "portfolio alignment metric" describing the extent to which their investments are aligned with the goal of limiting the increase in the global average temperature to 1.5°C above pre-industrial levels.
  • Set a non-binding target for the scheme in relation to at least one of their chosen metrics, and, so far as they are able, measure and report performance against it on an annual basis.

Timings

Trustees of schemes with relevant assets of £5bn or more have been in scope from 1 October 2021 and must publish the Report on a publicly available website within seven months of the end of the scheme year. The first of such Reports have now started to be generated for such schemes.

For schemes with assets of £1bn or more, the requirements apply from 1 October 2022. With this deadline fast approaching, such schemes should now be preparing to meet the disclosure and reporting obligations. Trustees should be considering what specific actions must be undertaken now and making sure that climate-related risks and opportunities are integral to their usual governance procedures.

Stuart O'Brien is partner at Sackers

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