Pension trustees to face increasing scrutiny on climate change

Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law, was commenting as the Met Office warned that the UK is experiencing the effects of climate change more rapidly than previously thought. In June, the independent Climate Change Committee (CCC) warned that despite high profile policy announcements, the UK is not moving quickly enough to reduce emissions and adapt to the risks of a changing climate.

Mandatory climate, governance, strategy and risk management requirements will come into force for the largest occupational schemes and authorised master trusts on 1 October 2021, and will be extended to schemes with assets of £1 billion or more from October 2022. Similar requirements are expected to be extended to smaller schemes on a phased basis.

Saunders said that “almost every scheme” is likely to need to make changes to its investment governance to take account of the new requirements. Those which will become subject to the regime from next year should be making preparations now, she said.

“The pensions sector, which controls trillions of dollars worth of assets, can turn the dial on climate change through its selection and stewarding of investments – and trustees also have a duty to take account of climate risk and opportunity to the extent that it is financially material,” she said.

“Schemes with assets of at least £1 billion must now take stock of where their scheme sits on the compliance scale and ask themselves whether their investment governance fits the bill and whether procedures are already in place to mean that, when the time comes, reporting will be straightforward. Trustees with already packed agendas must make the time to undertake some thorough due diligence on their investment processes so that they can have confidence that they are complying with their duties as well as with this new governance and investment regime,” she said.

According to the Met Office, which has published an annual climate assessment for the past seven years, the UK is now notably warmer, wetter and sunnier than it was 30 years ago, with the warming trend evidence across all months and all UK countries. Last year, 2020, was the first in which annual values for temperature, rain and sunshine all fell within the top 10 since records began in 1884. The year was the third warmest, fifth wettest and eighth sunniest on record and included 10 named storms, the UK’s third warmest day on record and the UK’s all-time wettest day on record.

Pension scheme trustees are already required to disclose how they take account of climate change and other environmental, social and governance (ESG) factors to the extent that these may have a material impact on scheme members’ benefits. From 1 October, schemes with at least £5bn in assets and authorised master trusts will be required to go much further, by assessing the impact of climate change on their investments and publicly reporting on that information in line with the recommendations of the global Task Force on Climate-related Financial Disclosures (TCFD).

The Department for Work and Pensions (DWP) published finalised guidance for trustees of occupational pension schemes on the new regime in June. A consultation on additional guidance from The Pensions Regulator (TPR), incorporating changes to its monetary penalty policy, closes at the end of this month.

Carolyn Saunders said: “It is clear, from TPR’s draft guidance, that the real regulatory focus will be on underlying governance rather than ensuring strict compliance with the reporting requirements”.

Pinsent Masons has developed a programme to help trustees comply with their duties (2-page / 606KB PDF) in relation to the governance of climate risk and opportunity and TDFD governance reporting.

Achieving effective governance of climate change risk and opportunity (2-page / 606KB PDF)