Regulator demands actions, not just words!

by John Wilson   •  
Blog

Overview

A new Climate Change Strategy published by The Pensions Regulator (TPR) calls on scheme trustees to act now to protect savers from climate risk.

The new Strategy comes ahead of proposed regulations, which will, starting from this October, require trustees of larger schemes to maintain oversight of, and make mandatory disclosures in relation to, climate risks. TPR is planning to publish guidance later this year, following engagement with industry, to help schemes comply with the new legislation, and make consideration of climate change risks and opportunities part of their systems of governance.

The Strategy also outlines TPR’s expectations that all scheme trustees will comply with existing requirements to publish their Statement of Investment Principles (SIP) - including policies on stewardship and financially material environmental considerations - and Implementation Statement. These disclosures represent compliance with the basics on climate change and are mandatory.

The Strategy

In his introduction, the CEO of TPR, Charles Counsell, compares climate change to the pandemic, but adds that:

“There is no vaccine, it is much more complex than that. It is equally urgent. Global heating has the potential to de-stabilise the social and economic conditions on which we depend for our pensions system. The impact has financial consequences as well.”

The Strategy sets out TPR’s strategic response to climate change and how TPR thinks it can help trustees meet the challenges from climate change. Key elements of the strategy are:

  • The government’s ‘Green Finance Strategy’, which includes an expectation that large asset owners would disclose in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations by 2022.
  • The Pension Schemes Act 2021, which codifies the above expectation.
  • Existing requirements for trustees of schemes with 100 or more members to set out in their SIP policies on stewardship and on ESG (including climate change) that they consider financially material.

Occupational pension scheme trustees, like all parts of our economy, will be impacted by the goal set by the government to bring all greenhouse gas emissions to net zero by 2050. Through management of the climate risk to their members, trustees will also play an important role. TPR has looked at what it thinks will be different over three time periods:

  • the 30-year horizon to 2050
  • a 15-year horizon aligned with TPR’s Corporate Strategy
  • the next three years, which is the first ‘sprint’ of delivering its Corporate Strategy.

 So, for example:

  • By 2035, “All schemes integrate climate change considerations in decision-making and take action as a result”.
  • By 2050, “Global economy operates on a low-carbon basis”.

The plans outlined in the Climate Change Strategy are aligned with TPR’s Corporate Strategy and include several overarching aims and objectives, such as TPR, as a business, taking part in the transition to net zero. From the perspective of trustees, it means that there will be regulation and, if necessary, enforcement of the requirements applying to pension schemes. To help, future guidance will illustrate how trustees can take national and international climate change goals into account. Also, noting that the measures in the Pension Schemes Act initially apply to larger schemes, TPR guidance will specifically consider how to take account of the impact of climate change in Integrated Risk Management (IRM); thus helping engage smaller schemes too. In addition:

  • the new single code of practice will include modules on climate change and stewardship; and
  • TPR will further support the development of trustees’ knowledge and understanding by updating the content on climate change in the Trustee Toolkit.

Trustees of most schemes already have a duty to report on stewardship and engagement activities through an Implementation Statement. TPR will review a selection of these statements and publish the findings. Trustees are also encouraged to sign up to the 2020 UK Stewardship Code.

All schemes, regardless of size, are expected to comply with the basics on climate change and, to help identify instances of non-compliance with disclosure obligations, TPR will implement new regulations by adding questions to the scheme return. These will request the web addresses for climate change-related documents. TPR will also publish on its website an index of the web addresses of schemes’ SIPs.

A Climate Adaptation Report will be published in Autumn 2021, outlining TPR’s findings on how those running pension schemes are responding to and managing the risks and opportunities from climate change.

Finally, it is worth emphasising that climate change is important for trustees of all schemes, not just DB schemes. The Strategy specifically states that “we believe particular urgency is required from DC trustees, whose savers are most directly at risk in this context”.

Comment

TPR’s Climate Change Strategy is yet another part of the growing matrix on ESG and climate change, and further evidence of how seriously the topic is being treated by policy makers and regulators. The key message for trustees can be captured in one final extract from the Strategy document:

“Trustees must clearly evidence that words and intentions translate into action”.

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