Climate risk reporting is now mandatory for pensions funds holding more than £1bn in the UK, making it the latest segment of UK’s financial sector now required to produce governance processes and disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD).
Under the rules, which came into force on 1 October, pensions trustees need to calculate and report on a portfolio alignment metric, which gives the alignment of the scheme’s assets with the Paris Agreement goal of limiting global warming to 1.5C above pre-industrial levels.
The Pensions Regulator (TPR) has published updated guidance which sets out what trustees need to include in their annual climate change report to comply with the new legislation. It provides examples of how to apply the regulations and the Department for Work and Pensions’ (DWP) statutory guidance.
The government is phasing the introduction of climate risk reporting across the pensions sector. Trustees of authorised master trusts and of larger schemes with net relevant assets of £5bn or more have already had to comply with the climate rules since October 2021.
As of the start of the month, the rules now apply to trustees of schemes with net relevant assets of £1bn or more, and the DWP has said it will consider whether to extend these rules to smaller schemes in 2023.
All trustees to which the new rules apply will need to calculate and report on a portfolio alignment metric for any scheme year ending after 1 October 2022, TPR explained. It has urged trustees to make sure they are prepared for changes to the regulations.
David Fairs, TPR executive director of regulatory policy, analysis, and advice, said the new metric should help trustees and their members understand and quantify potential risks to scheme investments arising from government actions taken to meet Paris Agreement goals.
“Trustees are not being asked to take action to stop climate change, but they must be ready to protect savers’ pensions from the material financial risks it poses, and to take advantage of opportunities from a global pivot towards low-carbon economies,” he said.
Trustees should calculate and use this new metric “as far as they are able”, TPR said, which suggests it recognises there may be limits to available data.
However, they should explain the reasons for any data gaps in the report and set out a plan for improvement, said Fairs.
“As the investment industry adapts to the new data capture and reporting requirements, more information should become available over time,” he added.
He said while trustees do not need to be climate change experts, they should have sufficient knowledge and understanding to be able to identify, assess and manage climate-related risks and opportunities for their scheme.
“We know this may be challenging for some, which is why we produced guidance, including an illustrative example charting how trustees of a fictitious pension scheme might approach meeting the requirements of the regulations, including the new portfolio alignment metric,” Fairs sexplained.
A version of this article appeared on BusinessGreen’s sister site Professional Pensions.
