UK pensions to pioneer mandatory climate change reporting

UK pensions are set to be the first in the world to be legally required to assess, and rectify, their exposure to climate change risk.

An amendment, including reporting requirements in line with the Task Force on Climate-related Financial Disclosures (TCFD), has been tabled to form part of the upcoming Pension Schemes Bill.

In a co-announcement by the secretary of state for work and pensions Therese Coffey and outgoing Bank of England governor Mark Carney, the government will work with trustees to ensure these are not disregarded like optional reporting requirements can be.

Under TCFD guidelines, UK pension schemes – responsible for more than £1.6 trillion in assets - will have to report on how they are considering climate change in governance, risk management and targets to encourage flows towards addressing the threat of climate change.

This amendment is a result of a recently formed working group, the
Pensions Climate Risk Industry Group, featuring representatives from The
Pension Regulator, The Department for Work and Pensions and the Department for
Business, Energy and Industrial Strategy.

Under the newly added ‘Climate Change Risk’ clause, subsection 41A of the Pension Scheme Bill includes the following requirements for trustees:

- reviewing the exposure of the scheme to climate risks

- assessing the assets of the scheme in light of climate risk

- determining, reviewing and (if necessary) revising a strategy for
managing the scheme’s exposure to climate change risk

- determining, reviewing and (if necessary) revising targets relating
to the scheme’s exposure to climate change risk

- measuring performance against such targets

- preparing documents containing information of a prescribed
description.

In addition, subsection 41B requires trustees to regularly publish
updates on their progress in line with the above and these reports have to be
made available free of charge.

To further compel trustees to comply with these requirements, the
amendment gives regulators the ability to issue fines if these requirements
aren’t met. Individuals can be fined up to £5,000 and fines of up to £50,000
can be issued for other cases.

Since October 2019, pension schemes have already been obliged to report on how ESG measures are incorporated. However, earlier this year research by the Society of Pension Professionals found only 2 per cent of trustees had made material changes to underlying companies as a result with 38 per cent regarding these requirements as a ‘box-ticking’ exercise.

Therefore, Coffey argues pension schemes should not be “dragging their
heels” when it comes to fighting climate change.

 “We’ve already introduced
regulations that require pension trustees to set out their policy on climate
change, but now we’re taking things a step further,” said Coffey.

 “I want the UK to continue
leading the way on the climate emergency defining the twenty-first century.”

However, there are concerns about the level of input and involvement
this will afford the state in private management of pension funds. The Pension
and Lifetime Savings Association (PLSA) said it welcomes any initiative that
helps pension schemes assess climate change risk, but Joe Dabrowski, the
association’s head of DB, LGPS and Standards, warns about the unprecedented
access this could afford government agencies.

“Achieving common forms of disclosure throughout the pensions and
investment industry has the potential to make a significant difference to
reporting and informing decision making,” said Dabrowski who identified certain
areas of the amendment as going “significantly beyond” the current requirements
on trustees.

He added: “If that’s the case it would set a dangerous precedent and be
wholly inappropriate. Nothing should cut across schemes’ fiduciary duty and
freedom to invest in members’ best interests – and this will vary scheme by
scheme. We urge the government to redraft the amendments and clarify its intent
and respect for this principle.”