As the government seeks powers to mandate pension schemes to disclose their climate change risks, the HSBC Bank (UK) Pension Scheme is already on its second report under the Task Force on Climate-related Financial Disclosures.
The trustees of the pension fund – a hybrid scheme with 187,491 members and £31bn assets at the end of 2018 – argue that “climate change is a systemic risk”, which they seek to manage on behalf of its members.
“This is especially the case for defined contribution members, as the value of their pension pots is directly related to the underlying investments,” the report, issued in December, states.
Mitigating this risk “plays an important role in how investments are managed across all asset classes, in both the DC and defined benefit parts of the scheme”, it adds.
Climate change risk could affect the creditworthiness of the issuers of the fixed income assets in which the trustee invests, the rental values of the real estate assets the trustee owns, and the dividend-paying capability
HSBC Bank (UK) Pension Scheme trustees
The HSBC scheme trustee board ultimately oversees climate-related risks and opportunities with two subcommittees that are in charge of the implementation of the trustee’s climate change risk policy: the asset and liability committee, which ensures it is implemented into the trustee’s investment policy, and the audit and risk committee, which ensures alignment in the trustee’s risk framework.
Its TCFD report notes: “Climate change risk could affect the creditworthiness of the issuers of the fixed income assets in which the trustee invests, the rental values of the real estate assets the trustee owns, and the dividend-paying capability.”
The primary focus of the HSBC trustees has been on its equity exposure, although steps are being taken to extend this to the scheme’s holdings in publicly traded corporate credit.
The board has a preference for engagement, rather than exclusion, “as a means to encourage greater disclosures and better practices with regard to climate-related risks”.
New legislation is imminent
The TCFD recommendations cover governance around climate-related risks and opportunities, their impacts, processes used to identify, assess and manage these risks, and the metrics and targets used to assess them.
However, as not many schemes have adopted them, the government has introduced an amendment to the pension schemes bill that will give the power to mandate disclosure of climate change risks and strategy in line with the TCFD.
In anticipation of this change and in response to other recent legislative developments, the Pensions Climate Risk Industry Group, set up by several government departments and the Pensions Regulator, has issued draft guidance on integrating climate considerations into pension scheme governance and disclosure.
Subject to a consultation that has been open since March 12, the guidance is split into three sections, covering the portfolio threats posed by climate change and corresponding regulation, how trustees can embed awareness of this into their strategies and disclosure, and technical considerations such as how to stress-test their portfolios and sponsor covenants.
Tim Manuel, head of responsible investment at Aon, puts it bluntly: “Without immediate and sustained action, we could see global warming in excess of 4C above pre-industrial levels by the end of this century, with the resulting economic losses expected to exceed $550tn [£470tn] in net present value terms over the same timeframe.”
Work in progress
TCFD reporting by pension trustees remains in its infancy for UK occupational schemes. Stuart O’Brien, partner at Sackers, confirms that only a few schemes have already reported, such as the HSBC scheme.
“However, I think there are quite a number of ‘fast followers’ – ie, schemes that have this on their radar and are currently doing the work to prepare for their first report,” he says.
For Penny Cogher, partner at Irwin Mitchell: “There are still issues around the scenario analysis assumptions – the lack of standardisation around the metrics and targets.”
This is mainly due to “a fundamental lack of clarity on the financial impact of climate-related issues on companies that limits the usefulness of the disclosures as regards decision making”.
So far the explicit regulatory requirements are limited. Claire Jones, head of responsible investment at LCP, notes that these amount to “just a requirement to include a policy on financially material considerations in the statement of investment principles and, for DC schemes from October 2020, to report annually on the implementation of this policy.”
DWP: Government will not dictate schemes’ ESG investments
The government insists it is not intervening in pension scheme investment strategies with a climate change amendment to the pension schemes bill introduced in February.
Despite the introduction of the amendment in the pension schemes bill, specialists question when these developments can be implemented.
According to Mr O’Brien, the new rules “only give a regulation making power to government, so there is a little way to go before mandatory TCFD reporting becomes the law”.
He and Ms Jones agree that when the regulations do come, they will be phased in so that only the largest schemes will be required to report first – possibly alongside DC master trusts.
