The Pensions Regulator (the Regulator) has recently published a review of the industry's first wave of pension scheme climate change disclosure reports, revealing some interesting examples of good practice as well as potential areas for improvement in the industry.
In this article, we provide a brief reminder of the pensions climate change governance and disclosure requirements, together with five key messages to take away from the Regulator's review in readiness for the next reporting cycle.
From 1 October 2021 the climate change and disclosure rules applied to the largest occupational pension schemes (with more than £5 billion of relevant assets), authorised master trusts and schemes providing collective money purchase benefits. From 1 October 2022, schemes with relevant assets between £1 billion and £5 billion in their relevant scheme accounting year have also been in scope. The rules require in-scope schemes to integrate climate risks and opportunities into scheme management and publish an annual report explaining how they have done so, in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
The Government intends to review how the TCFD rules apply to smaller schemes in the second half of 2023. In the meantime, the Regulator has announced that it has launched a new campaign to ensure that trustees are meeting their environmental social governance (ESG) and climate change reporting duties (including separate requirements to publish statements of investment principles and implementation statements, both of which include ESG content). The Regulator followed this announcement with a blog highlighting that it may take enforcement action where schemes breach their reporting obligations, and reminding them of their powers to issue fines of up to £50,000 where the trustee is a corporate body.
The TCFD rules for pension schemes fall under four headings – governance, strategy, risk management, and metrics and targets. Broadly, in-scope schemes need to:
Trustees must prepare their first report on how they have complied with the TCFD requirements within seven months of the scheme's first year-end after the rules applied to them. They must publish this on a freely available website, and produce a new report for each year thereafter where the scheme continues to be in scope of the requirements.
For further information on these requirements and other ESG and sustainable finance issues for pension schemes and their sponsors, please see the following resources:
In March 2023, the Regulator published a review of the first wave of schemes' TCFD reports, which were published during 2022, and commented on areas for improvement and emerging good practice. The Regulator has made clear that it expects reporting to evolve and improve as industry gains experience and data and analytical techniques develop. It is more likely to consider taking enforcement action in future where trustees fail to "step up" and keep pace with industry practice and the Regulator's developing expectations.
Here are five key messages from the Regulator's review:
1 Reporting style: TPR is encouraging trustees to strike a balance between showing they comply with the requirements and helping members to understand the report. The first wave of schemes adopted a range of approaches – the review found that reports varied in length from 10 to 85 pages, with an average of 34 pages. The Regulator praised "helpful non-technical summaries" included in some reports.
2 Net zero targets: Most reporting schemes had set "net zero" targets (broadly, where the net greenhouse gas emissions of the overall portfolio are zero). Of the 71 reports analysed, 43 had set a formal net zero target, representing around £450bn of assets under management. Five schemes aim to reach this by 2040 or earlier, one by 2045 and the remainder by 2050. In line with the Department for Work and Pensions (DWP) statutory guidance on targets, most schemes supplemented this with a clear interim target, such as reducing the carbon intensity of the assets by a certain level by 2030.
3 Trustee actions: It is clear to us that the Regulator is looking beyond whether schemes' published reports comply with the letter of the legislation, and that the Regulator is also interested in the substantive actions taken by trustees in response to climate risks and opportunities. The Regulator has noted since then that "[m]ore focus on outcomes is crucial. Early indications are some reports are light on actions. There are some who appear to regard these reports as merely a tick-box exercise. Reports lacking clarity over actions that have been taken or are being considered will only reinforce that view." The review cited several substantive trustee actions as "good examples", including:
4 Data: The Regulator acknowledges that, in practice, data quality and coverage remain a challenge in different areas of the investment chain, and that this can present issues for trustees, in particular for scenario analysis, metrics and targets. This is likely to continue to be a challenge as trustees begin reporting on scope 3 emissions (required from the second year that trustees are subject to the regulations). However, the Regulator also expects this to improve as investment firms adapt to the new requirements and trustees and their advisers learn from experience.
5 Improvements: The Regulator also highlights areas where it believes reporting can be improved in the next cycle, including:
