Climate and investment reporting: setting expectations and empowering savers

Blog 13 Jul 2022 By Tom Pook

The DWP has published the response to its consultation on climate and investment reporting, which was launched last October and ended in January. Alongside the response, it has also published the draft Occupational Pension Schemes (Climate Change Governance and Reporting) (Amendment, Modification and Transitional Provision) Regulations 2022 and two sets of guidance – one statutory and one non-statutory.

Assuming the regulations come into force as planned then, from 1 October 2022, pension schemes within scope will be required to measure and publish how their investments support the Paris Agreement climate goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels. The Government is quick to point out that the new measures will mean that, in less than three months’ time, more than 80% of UK pension scheme members will be invested in pension schemes subject to these new rules.

The draft regulations amend the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 which, from 1 October 2022, apply to trustees of trust schemes with relevant assets of £1billion or more on their first scheme year end date to fall on or after 1st March 2021.

Of wider interest is the DWP’s final statutory and non-statutory guidance for trustees of all schemes to help them understand and consider financially material Environmental, Social and Governance (ESG) factors and stewardship approaches in their investment decision making.

Key takeaways from the latest ESG and stewardship developments include:

  • Larger occupational pension schemes (with assets in excess of £1 billion) and authorised DC master trusts will need to calculate and report an additional “portfolio alignment” metric from 1 October 2022. The portfolio alignment metric will measure the extent to which a scheme’s investments are aligned with the Paris Agreement goal of limiting the global average temperature increase to 1.5°C above pre-industrial levels.
  • Final stewardship guidance is split into statutory guidance and non-statutory (‘best practice’) guidance. The statutory guidance applies to Implementation Statements (IS) for any scheme year ending on or after 1 October 2022. The non-statutory guidance focusses on stewardship reporting in Statements of Investment Principles (SIPs) and applies from 17 June 2022. Interestingly, the final guidance confirms that The Pensions Regulator (as opposed to pension scheme members) is the primary audience for the SIP and IS, but member facing summaries of these documents are encouraged.
  • New non-statutory guidance for SIPs explains that the Government expects trustees to either set their own voting policy or, if they have not set their own policy, to explain in the SIP how they will monitor their asset manager’s voting policy. Trustees should not simply state in the SIP that they delegate engagement and their voting rights to their investment managers.
  • Statutory guidance for the IS provides that trustees should explain whether the voting undertaken on their behalf reflects their voting policy (or, if they use their asset manager’s voting policy, they should summarise how it reflects the trustees’ stewardship priorities). If asset managers are unable to give details of significant votes in time for publication of the IS, trustees should include as much detail as possible (including what information is missing, and why). Usefully, there is clarification that trustees can provide links to their managers’ voting policies, if applicable.
  • Where trustees set an ‘expression of wish’ on voting in relation to a particular investment, they should indicate in the IS whether this has been considered by their asset manager when describing voting behaviour. The guidance also provides information on significant voted and sets out how trustees should disclose the most significant votes.

The non-statutory guidance on SIPs took effect from 17 June 2022, so schemes should already be starting to consider how to reflect their stewardship policies in the SIP. Trustees should also be thinking about the prospective impact of the new statutory guidance on the IS.

Tom Pook

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