The Pensions Regulator (TPR) has reviewed a selection of pension schemes’ annual climate reports, finding that, while there are areas of emerging good practice, there are also areas for improvement.

As a reminder, new regulations[1] came into force on 1 October 2021 which aim to improve the governance and reporting of climate-related risks and opportunities.  The regulations now require trustees of schemes with £1 billion or more in relevant assets, authorised master trust schemes and authorised schemes providing collective money purchase benefits to identify, assess, manage and report on climate-related risks and opportunities.  These reporting requirements were developed from the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

Areas for improvement

While TPR noted that some climate reports contained positive examples of trustee action, including the development of trustee policies on investment beliefs in relation to climate change and the use of stewardship to manage climate-related risk, TPR’s review also found some areas where reports could be improved.

At this stage, the results of the review is intended to help educate trustees, advisers and those preparing climate change reports so that they can address any gaps in required disclosures in future reports. TPR has confirmed it is unlikely to issue penalty notices this year except where:

• the report has not been published on a publicly available website, accessible free of charge, within 7 months of the relevant scheme year end (a mandatory penalty of up to £2,500) or
• it is clear that the trustees have not made a genuine effort to comply with the requirements (a discretionary penalty of up to £50,000).

However in future, TPR has warned that it will consider issuing penalty notices where reports fail to meet the requirements of the regulations.

Common issues highlighted in the review included:

• A lack of sufficient background information on the scheme, meaning that disclosures were difficult to interpret – this was the case for more complicated arrangements such as hybrid schemes in particular;
• Disclosures of strategy, scenario analysis and metrics activities were not always provided at the appropriate level as described in the DWP’s guidance;
• Accessibility issues such as the use of PDFs which were not compatible with those using reader accessibility requirements and long and complicated web addresses, making it difficult for savers to find and access online reports; and
• In some instances, the complete omission of certain disclosures required by DWP’s statutory guidance.

In light of the “core financial risk” that climate change is likely to continue to pose to savers’ pensions, Louise Davey, Director of Regulatory Policy, Analysis and Advice at TPR, urged trustees and their advisers who are in scope of the regulations to read TPR’s review and consider how they can improve their governance and reporting of climate-related risks and opportunities.

What should the TCFD reports contain?

The TCFD’s recommendations establish a set of 11 disclosures about the risks and opportunities presented by climate change, spanning four areas: governance; strategy; risk management; and metrics and targets. 

One of the key aspects of TCFD reporting is “scenario analysis”, a technique which should enable trustees to assess how assets (and, for DB schemes, their liabilities) may be affected by different climate-related scenarios.  In terms of carrying out a scenario analysis, trustees can ask their asset managers for the results of their own scenario analysis, ask their consultant or third party provider, or do it themselves using the free Transition Pathway Initiative tool or free PACTA tool.

TCFD also recommends the setting of targets, which can be both process-based targets around investment, engagement and voting, and outcomes-based targets such as a reduced portfolio carbon intensity or a higher proportion of holdings in better prepared companies.

With expertise and experience in this area, our pensions team can help you understand your obligations in this area.

Should you wish to consider any ESG issues further, do take a look at our interactive guide, which has been designed to help you easily navigate the law and guidance surrounding ESG.

This blog was written by Scarlett Sullivan. 

[1] The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (as amended) and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021.