We reported in August that the Pensions Regulator (TPR) had responded to concerns that financial institutions including pension schemes are relying on inadequate climate data when making investment decisions.
This week there have been further developments in this area. TPR's Climate and Sustainability Lead (Mark Hill) has published a blog explaining what trustees can do to drive change in relation to climate scenario analysis.
The blog mentions that previous reports by TPR and other industry bodies such as the Institute and Faculty of Actuaries have highlighted the limitations of current models and scenario analysis. In particular, they question the validity of some published outcomes which appears to seriously underestimate the financial risk from climate change.
As the blog says, it is essential that trustees feel confident to question and challenge their advisers and the output from climate scenario analysis. Decision-useful climate scenarios are a key part of effective transition planning. The challenge is to ensure that models used and scenario analysis addresses a fuller range of real-world risk and uncertainties.
Usefully, the blog reiterates that trustees do not need to be climate experts but should:
- have an appropriate level of knowledge and understanding of climate issues
- undertake regular training and ask for additional training if they do not feel comfortable making decisions based on the information provided
- regularly review the climate-related capabilities of service providers and consider the need for additional advisers or specialist input
- be able to understand the narratives underlying their climate scenarios, the limitations of those scenarios and the assumptions made in their construction
- broadly rationalise the outputs from those scenarios for their scheme
- consider with advisers the use of stress testing and tail risk analysis to complement their climate scenario input to investment strategy decision making.
Where trustees are at the stage where they have completed their scenario analysis but not finalised their TCFD report, TPR says it would be useful for members if trustees provided additional commentary on the analysis they carried out and how they expect it to develop.
We have launched a Pension Schemes ESG Tool, helping trustees and sponsoring employers understand their ESG obligations. Download it for free here.
We are well placed to advise on ESG in relation to pension schemes of all sizes. If you would like to explore this topic further, please contact Kate Granville Smith.
"It’s time to take a step back. We need to collectively consider what needs to be done to address the shortcomings in the available models and approaches to scenario analysis if we are to create truly decision-useful climate scenarios." Mark Hill, TPR