The industry has broadly backed proposals to require the largest schemes to publish climate risk disclosures but raised concerns about the workload of implementation as well as how to standardise the methodology used.
The Department for Work and Pensions' (DWP) proposals, published yesterday (26 August), will require the 100 largest occupational pension schemes - those with £5bn or more in assets and all authorised master trusts - to publish climate risk disclosures by the end of 2022. Around 250 more schemes with £1bn in assets would then have to meet the same requirements in 2023.
The move was broadly backed by the industry - with the Pensions and Lifetime Savings Association saying such a framework was "essential".
Head of defined benefit, Local Government Pension Scheme and standards Joe Dabrowski explained: "Having a clear and common framework across the pensions sector and financial services to report and assess climate investment risk is essential to manage the potential impact of climate change on scheme member outcomes."
Despite this, Isio partner Patrick Race said that, while he broadly welcomed the initiative - and said it was a strong sign from the government that it is taking climate risk seriously - it would mean additional work for trustees at an already busy time and noted there were also potential issues over the standardisation of the disclosures.
He said: "As the minister acknowledges, this will mean extra work for already busy trustees, many of whom are dealing with the major implications of the global pandemic on their investment portfolios and sponsors. Equally, while the DWP's announcement is directed at the largest occupational schemes initially, it will be interesting to see how these new requirements will in time translate to smaller schemes which already tend to be behind the ESG curve due to resource limitations.
"While we fully agree with the requirement to comply with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, we are likely to be looking for clarity on how some of the disclosures should be standardised across the industry. Disclosure will mean scheme comparisons and member questions - it will be unhelpful if arguments over methodology around 100 trustee tables distract from the positive thrust of the proposals."
Sackers similarly supported the proposals but also agreed the proposals could pose "challenges" for some.
Partner Ralph McClelland said: "While many pension schemes are already some way down this road, implementing the proposals could pose challenges for trustee boards, particularly those with smaller schemes."
EY UK sustainable finance consulting leader Gareth Mee agreed. He said: "This paper calls for higher levels of governance, more focused strategic direction and improved risk management from pension schemes, which is to be commended. However, the timings are ambitious, and are more challenging than those previously imposed on the banking and insurance sectors.
"The pensions industry has a significant amount of work to do to fully embed the proposed changes, which will likely include creating new investment strategies, new approaches to managing risk, new services and ways of engaging stakeholders, and better stewardship, which is already a challenge for asset owners as they look to meet the new 2020 UK Stewardship Code standards."
Others said the move to target larger schemes could support smaller schemes as investment managers change the way in which they work.
Dalriada Trustees professional trustee Vassos Vassou explained: "Trustees have had to deal with lots of recent changes over ESG and climate change but this goes one step further by asking the largest schemes to report against the TCFD framework.
"The investment managers of those schemes will in turn have to be supportive of what the trustees require. This will help change the behaviour of investment managers and will also put a spotlight on the trustees who will have to show what actions they have taken on climate change. I would hope too that the impact of these requirements will also trickle through to smaller schemes who often use the same investment managers."
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