New climate change duties for pension scheme trustees

• United Kingdom

• Pensions

27-05-2020

This speedbrief provides an update on:

• amendments to the Pension Schemes Bill to allow the Government to impose new duties on trustees relating to climate change
• the Department for Work and Pensions’ (“DWP”) consultation on climate change disclosures for pension schemes

Climate change requirements in the Pension Schemes Bill

Before Parliament shut down for an extended Easter recess, it published an updated version of the Pension Schemes Bill 2019-21 on 4 March 2020.

This version included an amendment, agreed in the House of Lords committee stage of the Bill, which would allow the Government to impose new duties on pension scheme trustees intended to ensure effective governance in relation to climate change.

These new powers could be used to require trustees to:

• review the scheme’s exposure to certain risks
• assess certain types of assets held by the scheme (and determine their contribution to climate change)
• determine, review and (if necessary) revise a strategy and/or targets for managing the scheme’s exposure to certain risks
• measure performance against such targets
• prepare additional documents and publish information relating to the effects of climate change on the scheme

The amendments also include penalties of up to £50,000 for breaching the new requirements.

The amendments on climate change were proposed by Baroness Hayman, co-chair the House of Lords cross-party group Peers for the Planet. They are intended to provide for pension schemes to align their portfolios with the Paris Agreement objectives (i.e. to limit the increase in global average temperatures to 1.5°C above pre-industrial levels) and report against the framework of the Task Force on Climate-related Financial Disclosures (“TCFD”).

DWP Consultation on Climate Change Disclosures

The DWP issued a consultation on climate change disclosures for pension schemes on 12 March 2020. This set out non-statutory guidance for pension scheme trustees on assessing, managing and reporting climate-related risks in line with the TCFD framework. The draft guidance has been drawn up by the Pensions Climate Risk Industry Group (“PCRIG”), which was set up last summer by the DWP, the Pensions Regulator and other pension representatives.

The consultation was originally intended to run until 7 May 2020, with final guidance due to be published in the autumn. This deadline was extended on 1 April, and the consultation will now run until 2 July 2020.

The draft guidance may also change when the climate change provisions in the Pension Schemes Bill are enacted.

Overview of the TCFD recommendations

The TCFD establishes a set of eleven recommended disclosures about the risks and opportunities presented by climate change.

These recommendations are intend to encourage greater transparency by trustees and assist trustees in making better informed decisions on climate-related financial risks. By applying the TCFD recommendations and making the recommended disclosures, the DWP intends that trustees will be better placed to properly assess and understand what climate change actually means for them.

In order to meet TCFD recommendations, trustees will need to address four disclosure topics: governance, strategy, risk management and metrics and targets.

Impact on governance

The draft guidance recommends that trustees should allow appropriate time and training to ensure that they have a sufficient understanding of climate change to define their investment beliefs and consider the roles and responsibilities within the trustee board (and, where applicable, any sub-committees and/or individuals/organisations providing executive support to the trustees) for climate-related issues. There are detailed suggestions about the type of climate change knowledge trustees should have.

Impact on investment decisions

The consultation includes detailed guidance about the climate change related issues that trustees should take into account when setting investment strategy and how climate change risk can be managed in different types of portfolio. It reinforces that climate change should also be factored in to the selection, monitoring and review of investment managers.

The draft guidance also considers how trustees can ensure effective stewardship, how they can hold investee companies to account and the types of good corporate behaviour they should look for.

In addition, it sets out suggestions on how schemes can make TCFD aligned disclosures and communicate effectively with members on climate change.

Response from the Pensions Regulator

The Regulator has welcomed the consultation, saying: “Climate change is a core financial risk which pensions trustees must consider when setting out their investment strategy. That’s why PCRIG’s guide is so important as it will help trustees demonstrate how they are taking this and other financially material considerations into account over the lifespan of their investments. [We] urge the industry to take part in this consultation and help shape guidance which will ultimately mean savers are best protected from the far-reaching financial risks that could arise from climate change and a transition to a carbon-neutral economy.”

Next steps

Many trustees would need to put in place new governance structures to identify and continuously monitor climate change risk in order to comply with the new guidance. The compliance burden would be greater for larger schemes.

Trustees should consider taking the following steps in response to the consultation and the proposed changes in the Pension Schemes Bill:

• Trustees planning to respond to the consultation should do so by 2 July 2020
• Trustees of larger schemes should start formulating an action plan for how they would comply with the new disclosure requirements if they were enacted, including:
  • considering whether they need to obtain further training (e.g. from their current investment consultant, an ESG specialist consultant and/or their legal team)
  • assessing whether they would need to change how they make investment decisions in order comply with the draft guidance
  • identifying the individuals and/or sub-committees who would implement those plans if needed
  • determining whether they need further information from their asset managers and investment consultants in order to comply with the new regime
  • considering how greater transparency could affect how they communicate with members and the scrutiny they face from industry groups

For further information on the consultation and other ESG issues (such as the new disclosure requirements relating to SIPs and implementation statements) read the latest edition of our pensions investment newsletter.