TPR’s ESG guidance raises industry concerns on privacy and penalties

The Employer Covenant Practitioners Association, meanwhile, has raised concerns about the privacy and confidentiality implications of climate risk reporting.

TPR’s consultation, to be read alongside the documents published by the Department for Work and Pensions in this area, laid out the guidance for trustees in regards to the requirements for governance and reporting of climate-related risks and opportunities.

The new regime comes into effect in October 2021 for schemes with more than £5bn in assets, and the consultation included draft guidance on penalties for non-compliance.

For some employers, the impact of climate-related risks and opportunities on their covenant could be significant and require considerable investment to be made or significant strategic decisions to be taken. The commercial sensitivities around these matters could be such that public disclosure would be strongly resisted

Andy Palmer, ECPA

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, TPR must issue a mandatory penalty of at least £2,500, for example.

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

Guidance not clear on compliance and penalties

Though a number of the responses to the consultation, which closed on Tuesday, were broadly positive about TPR’s proposals, some in the industry felt more clarity around certain points would have been useful.

In its response, the SPP argued that TPR’s draft guidance was not sufficiently clear on the proposed approach for applying discretionary penalties against schemes that breach regulations.

Chief executive Fred Emden wrote: “At this stage, the draft guidance does not provide enough beyond what is already issued by the DWP.

“It would be helpful if [TPR] could provide more specific examples of the types of behaviours that might cause it to use its discretionary enforcement powers and penalties,” he continued, citing the draft guidance covering the new criminal powers in the Pension Schemes Act as an example of good practice in this area.

He added, however, that the SPP supports the regulator’s “patience in allowing practitioners the opportunity to develop solutions that work in a practical rather than an abstract sense”. 

“We hope this will allow the largest schemes that have access to advisers to innovate in this area and to shape their practical implementation of the measures in a way that is appropriate to their needs,” he explained.

“We would then hope that future regulatory guidance is drafted and regularly updated once you have had the opportunity to reflect on and absorb the lessons of this new legislation and process, and thereby indicate practices that will help less well-resourced schemes meet these requirements in an efficient way.”

Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, sounded a similar note, saying: “We encourage TPR to ensure that focus is on working with trustees to improve standards and not on issuing fines and enforcement action unnecessarily.

“To that note, we support the common sense approach TPR has taken with its mandatory and discretionary monetary penalties policy. It should give trustees reassurance that enforcement action will be undertaken sensibly and will take into account the gaps in data available to investors and the rapidly evolving regulatory environment.”

Privacy concerns

In its response, the ECPA voiced its concerns about the privacy implications of the new rules, calling for greater clarification on how trustees are supposed to comply with the new legislation from a covenant perspective.

Specifically, the covenant trade body argued that it would be helpful to understand the extent to which the regulator expects employers to be able to limit the amount of information provided to trustees to respect confidentiality, given the public nature of trustees’ reports.

Andy Palmer, chair of the ECPA, said: “For some employers, the impact of climate-related risks and opportunities on their covenant could be significant and require considerable investment to be made or significant strategic decisions to be taken. The commercial sensitivities around these matters could be such that public disclosure would be strongly resisted.”

He added that it would be helpful if TPR reiterated that the targets set by trustees “should be scheme-specific and should not conflict with trustees’ fiduciary duties, or the investment policies stated in the statements of investment principles”.

“An excessive focus on portfolio optimisation to meet targets at the expense of scheme objectives could be contrary to trustees’ fiduciary duty under trust law,” he explained. 

“There is no expectation that trustees should set targets which require them to divest or invest in a given way, and the targets are not legally binding.”

Covenant monitoring matters

Michael Bushnell, managing director at Lincoln Pensions, and Will Martindale, group head of sustainability at Cardano, wrote in their consultation response that more examples would help industry players understand and contribute to industry best practice.

On the climate competency of service providers in particular, they “believe that the focus in the example should be broader”. 

“It seems key that trustees of DB schemes consider as a priority the ability of their covenant advisers to assess the risks of climate change and apply these to the required scenario analysis, given the employer covenant may represent a scheme’s largest, non-diversified asset/risk,” they said. 

“Starting with a suggestion that the trustee will undertake the assessment of all advisers, followed by a detailed overview of the investment approach seems more appropriate to us.”

Bushnell and Martindale further argued that the draft guidance around strategy and scenario analysis does not place enough emphasis on, for example, assessing employer covenants.

“We do not believe that speaking to the employer is an adequate substitute for assessment by trustees, in the same way that management forecasts should inform but not replace trustees’ considerations of future performance,” they wrote.

Dabrowski highlighted a number of other areas that would “benefit from further refinement or development”, such as reporting expectations across different asset classes “where data availability may be highly varied”, as well as “guidance on the use of qualitative scenario analysis, the impact of climate issues on covenant risk, and also ensuring that all elements of the information sought and the format in which it can be received can be used purposefully and understood by regulators and scheme members alike”.

In response, a spokesperson for the Pensions Regulator said: "We are grateful to trustees and advisers for the important part they played in helping shaping our guidance by responding to our consultation and taking part in our series of stakeholder engagement events.

“We will be reviewing the written responses to our consultation, alongside feedback from external events, and will consider how best to meet the additional needs highlighted. We plan to publish the final guidance before the end of November.”