Are schemes ready for climate-related financial disclosures?

The requirement to have reporting metrics in place will also apply to schemes with £1bn or more in assets from October 1 2022, while schemes with assets below £1bn must also meet the same requirements in 2023. In each case, such schemes should publish their climate-related disclosures in their subsequent annual report after the target date. 

In a conference held by the Pensions and Lifetime Savings Association on environmental, social and governance factors, David Fairs, the Pensions Regulator’s executive director of regulatory policy, analysis and advice, discussed the importance of climate risks for both regulators and pension schemes.

Pension funds are slow moving beasts, and if there was not a significant shift in regulatory requirements then the pace of change for pension schemes could be glacial

David Fogarty, Dalriada Trustees

During the discussion, he affirmed that trustees must take steps to identify, assess and manage climate risks and opportunities, as well as report on what they have done. But risks remain as to their ability to do that, specifically around data gathering.

Fairs explained that for trustees to be able to show that information and comply with the requirements, they will need investment managers to be able to provide them with the right information too. Yet investment managers themselves will require such information from the corporations in which they invest.

Thus, one major potential difficulty exists in that the mandatory requirements around climate-related financial disclosures currently differ across industries, even if their fortunes are interwoven and it is known that, at present, trustees may not always have the information required to report well. 

“In fact, data is probably the key barrier for sustainability disclosures, both the quality of the data and its availability,” Fairs said.

In ensuring that trustees are better prepared for TCFD later this year, TPR recently launched an eight-week consultation on the new regulations that will give trustees further clarity on what will be expected of them and what may happen if they are unable to comply.

Fairs said: “It’s worth noting that we are proposing to treat failures of governance activities more seriously than failures in reporting. And that’s because we want to see more from trustees than superficial box-ticking. We want to see them make a positive change in their behaviour.”

The penalties policy in the consultation has also been revised, and outlines TPR’s approach to imposing penalties for non-compliance. Where trustees in the scope of the legislation fail to publish a climate change report on a publicly available website — accessible free of charge — within the required timeframe, the regulator proposes issuing a mandatory penalty of at least £2,500.

For other breaches of the new regulations, there will be a range of enforcement options including the discretion to issue a penalty notice. 

Plenty of time to comply

Adam Gillett, head of sustainable investment at Willis Towers Watson, is very supportive of the recommendations, which he says will encourage schemes to adopt better practice to ensure climate risks and opportunities are well-considered. 

But he also explains that for some schemes TCFD may be seen as significant work, on top of roles that are often already taxing. “Things are getting more and more complex, and more demands are being placed on trustees,” he says.

“Particularly for those schemes that have a more limited governance, budget or do not have internal resources and executive teams to help, then it’s extra work, and it’s tough.”

Gillett points out that for those bigger schemes that are in the first wave, the majority are in a good place as there has been plenty of consultation and engagement on what is happening around TCFD. But, as ever, there will be a mix, with some schemes better prepared than others.

He says that applying the recommendations will not be impossible, citing HSBC, where the trustees have used climate-related disclosures for several years as an example of how schemes should be able to successfully comply. 

Claire Jones, partner and head of responsible investment at LCP, also holds the opinion that trustees have had more than enough time to meet the new government rules. She explains that though trustees are concerned about the volume of work, the staggering of required deadlines should make things more manageable. 

For instance, metric targets and scenario analysis requirements only need to be met by the next scheme year-end, and the reporting seven months after that. 

Jones notes there is still time for trustees to better prepare. It is important to remember that not only should climate change risks be assessed by October 1, but trustees must also get processes in place for the months ahead so that on an ongoing basis they can “be assessing and managing climate risks and opportunities for the scheme, and I think once you start to frame it in those terms it’s not as daunting”, she says.

In response to the consultation launched on July 5 by TPR, Jones points out that there is always a risk that some trustees may feel reluctant to get started until they have all the information.

She says it is understandable that the regulator is setting out another consultation as it has not had much time to put the guidance together, but it could leave trustees very little time to implement any required changes.  

TCFD will lead to better outcomes

David Fogarty, director of Dalriada Trustees, tells Pensions Expert that having TCFD in place is a good idea and that trustees have moved a long way in a short space of time, which he believes is necessary.

He says: “Pension funds are slow moving beasts, and if there was not a significant shift in regulatory requirements then the pace of change for pension schemes could be glacial.

“As a professional trustee we are quite comfortable with the direction of travel and a number of requirements from TCFD will lead to good behaviours, better understandings and better outcomes.”

Fogarty says that he has not come across any specific cases of trustees who have had issues complying with the new government rules. He says that from personal experience of involvement with a £2bn scheme, they are thinking about the issues now despite smaller schemes following TCFD rules later in 2022.

He notes that at present his biggest observation is that there are probably four webinars a week on TCFD, which he believes fail to focus on what trustees should do as of now. 

He describes how he saw a deck from one of the major investment consultancies that stretched to 20 pages without suggesting what trustees should be asking their managers about climate risk exposures.

Fogarty says that for both £5bn and sub-£1bn schemes, it is time for trustees to be asking all managers for their climate policy, so that the trustee can have the data and get a sense of things such as carbon intensity now and potentially in the future.

He adds that TPR, to an extent, understands this is new ground for many. “I remember a comment being made on a webinar a few months back, which went along the lines of, ‘it does not matter if you get it right the first time, just do something’,” he says.

“I think there is a sort of evolutionary aspect with this — measure something, observe, reflect and engage, measure again. And I think that you just have to get into that sort of process.”