Pension schemes to tackle deforestation in climate push

Writing in Responsible Investor with Lord Goldsmith, minister for the Pacific and the international environment, Opperman said that because “forests and land use are a significant source of carbon emissions”, any action on climate change “will need to take deforestation into account”. 

“During our COP26 presidency, we are putting forests front and centre of our global response to climate change. Ending deforestation would make the single largest contribution to greenhouse gases reduction targets for 2030, taking 3.5 gigatons of carbon out of the system every single year. That’s 10 per cent of the emissions reductions we need during this decade,” the ministers said.

They added that “several significant UK-based pension funds [have] committed to transitioning their portfolios away from activities that are driving deforestation”, and that new Task Force on Climate-related Financial Disclosures requirements, coming into force in October this year, will enable members to “see and understand the progress that is being made”.

“It is clear that the British people care passionately about making sure their savings are part of the solutions, and they deserve to know whether pension fund managers are using their hard-earned money in a way that jeopardises or prioritises the future for which they are saving,” they continued.

“In the coming weeks, we will be reaching out to UK pension funds to help them further understand deforestation issues and how to manage this risk as effectively as possible.”

The Department for Work and Pensions declined to give further details about the nature of these talks.

TNFD publishes draft framework

Meanwhile, the Taskforce on Nature-related Financial Disclosures put its draft nature-related risk management framework out to consultation on March 15. Drawing heavily on standards set previously by the TCFD, the TCND’s framework comprises three parts: “foundational guidance”, including key concepts and definitions; TCFD-aligned disclosure recommendations; and “how to” guidance for risk and opportunity analysis.

The TNFD billed the framework as “the first integrated approach to incorporating nature-related risk and opportunity analysis into the heart of corporate and financial decision-making”, and said publishing the draft version “marks the beginning of an 18-month process of consultation and development, together with a broad range of market players and stakeholders”.

Its disclosure requirements are based on the same “four pillars” developed by the TCFD, these being governance, strategy, risk management, and metrics and targets.

For instance, one disclosure requirement mooted would have organisations “describe their key nature-related targets, including location-specific targets for priority locations, where relevant, and in line with anticipated regulatory requirements or market constraints or other goals”.

They will also need to describe their risk management processes for identifying and assessing nature-related risks, including how they determine their relative significance and how they have been made location-specific.

The TNFD said the broad alignment between its framework and that of the TCFD was a response to industry calls for a consistent approach to, and language around, sustainability reporting.

It added that the framework is designed with a future “global baseline for sustainability standards” in mind, albeit it will allow for flexibility “for those organisations that wish to, or need to, report to different materiality thresholds and regulatory requirements. 

“The TNFD is in dialogue with a range of standards-setting bodies and regulatory authorities, and will follow further developments related to national, regional and global approaches to sustainability reporting standards as they are developed,” it stated.

David Craig, co-chair of the TNFD, said that an improved understanding of nature and nature-related risks “is a critical enabler of better corporate strategy, better capital allocation decisions, better governance, and better risk management and disclosure practices”. 

“With climate change and nature-related impacts and risks increasing, it is essential that companies incorporate natural assets into their strategic planning and risk management if they are going to succeed,” he said.

“The approach we are taking of developing this guidance with market participants through an iterative, open innovation process over the next 18 months will help to ensure our final recommendations are both science-based and practical to implement. 

“We invite all market participants and stakeholders to review this first prototype of the framework and share their feedback.”

A further three iterations of the draft framework are expected to be published, the first planned for June 2022, the second for October, and the third for February 2023, with the final release of the TNFD’s recommendations slated for September next year.

Despite having the endorsement of the prime minister and the G7 finance ministers, there is “currently no suggestion that the TNFD disclosures will become mandatory for pension schemes in the UK in the same way as the TCFD disclosures, although some elements may eventually find their way into the sustainability disclosure requirements”, LCP stated.

“In the meantime, the draft framework provides a valuable resource for pension scheme trustees and sponsors who wish to develop their understanding of nature-related dependencies, risks and opportunities,” the consultancy added.