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Climate risk update - a quick guide
7 June 2021

Climate risk update - a quick guide

The Pension Schemes Act 2021 (the Act) introduces a requirement for occupational pension schemes to manage the effects of climate change as a financial risk, and to report on how they have done so in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. A compliance framework regarding the new duties will be put in place, including additional powers being given to The Pensions Regulator (TPR).

The aim of this new legislation is to ensure that trustees of the biggest pension schemes limit the risk climate change poses to members’ benefits and to support the government’s Green Finance Strategy under which all large asset owners will make disclosures, inline with TCFD suggestions, by the end of 2022.

The government consulted on regulations that imposed requirements on trustees to ensure effective governance of the scheme in light of the effects of climate change. The recently published consultation response confirms that trustees who are subject to the new requirements will have the following ongoing duties:

Governance: establish and maintain oversight of climate-related risks and opportunities. Trustees must establish and maintain processes to ensure that those undertaking governance on their behalf are taking adequate steps to identify, assess and manage climate related risks and opportunities.

Trustee Knowledge and Understanding (TKU): have the appropriate knowledge and understanding of the principles relating to the identification, assessment and management of climate change risks, and opportunities to enable them to properly exercise their functions.

Strategy: identify and assess the impact of climate-related risks and opportunities, which will have an effect over the short, medium and long term, on the investment and funding strategy.

Scenario analysis: undertake scenario analysis; assessing the potential impact on the scheme’s assets and liabilities, the resilience of the investment and funding strategies for at least two scenarios, one of which corresponds to a global average temperature rise of 1.5-2oC inclusive, on pre-industrial levels.

Risk management: establish and maintain processes for the purpose of being able to identify, assess and effectively manage relevant climate-related risks.

Metrics: select and calculate an absolute emissions metric and an emissions intensity metric in respect of the scheme’s assets, and select one additional climate change metric to calculate in respect of the scheme’s assets.

Targets: set a non-binding target for the scheme in relation to at least one of the metrics they have selected.

Disclosure: publish their TCFD report on a publicly available website, and provide TPR with the website address for their most recent TCFD report, Statement of Investment Principles (SIP) and Implementation Statement.

The first wave

Schemes with £5 billion or more in assets are subject to these requirements from 1 October 2021. They must publish a TCFD report by the earlier of:

  • 7 months after the end of the scheme year which is underway on 1 October 2021, or
  • 31 December 2022.
The second wave

Schemes with £1 billion or more in assets will be subject to the requirements from one year after that scheme year end date and must publish their TCFD report by the earlier of:

  • 7 months after the end of the scheme year which is underway on 1 October 2022, or
  • 31 December 2023.

Given the extensive requirements associated with the incoming changes, trustees should start discussing the new obligations with their advisers.

Notes/Sources

This article was featured in Pensions Aspects magazine June 2021 edition.

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Last update: 3 June 2021

Mark Jenkins
Mark Jenkins
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