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Climate risk governance and reporting to be required of UK pension schemes

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The UK government will take forward new climate risk governance and reporting requirements for trustees of occupational pension schemes, beginning with the largest schemes.

It is also proposing longer term changes to reporting requirements, with a view to enabling schemes to disclose the 'implied temperature rise' (ITR) of their investment portfolio in line with the 2015 Paris Agreement target to limit global warming this century to well below two degrees Celsius above pre-industrial levels.

The consultation, which closes on 7 October, contains detailed regulations and statutory guidance which build on the climate change reporting requirements contained in an amendment to the Pension Schemes Bill, which has now progressed through the House of Lords. It also sets out the government's longer-term thinking on climate change disclosure. The requirements extend to schemes in England, Wales and Scotland.

All trustees can also take confidence from the strong message that they should be addressing climate risk, even though climate risk analysis is not a perfect science.

Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law, welcomed the consultation.

"Most trustees now accept the importance of managing climate risks and opportunities, but may struggle with understanding how best to do this," she said.

"The detailed regulations and statutory guidance being proposed will help the trustees to whom they apply navigate this difficult area by providing them with some real focus and support - and that, in turn, will empower them to drive the further development of the data and tools needed for trustee decision-making. All trustees can also take confidence from the strong message that they should be addressing climate risk, even though climate risk analysis is not a perfect science," she said.

Pension scheme trustees are currently 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' savings. An amendment to the Pension Schemes Billintroduced in February, goes much further, by requiring the largest schemes to assess the impact of climate change on their investments and to report that information to scheme members.

The government is now proposing that this reporting should follow the 11 recommendations of the global Task Force for Climate-related Financial Disclosures (TCFD), which cover governance, strategy, risk management and accompanying metrics and targets. These requirements would apply to schemes with £5 billion or more in assets from October 2021, as well as to authorised master trusts. They would be extended to schemes with £1bn or more in assets the following year, with a consultation to follow in 2024 with a view to extending them to smaller schemes.

Reports will need to be published on the scheme's website or the website of the scheme's sponsor, and members notified on where they can access this report. The full report need not be included in the scheme's annual report, but should be referenced. Trustees would also be required to provide a link to the report to the Pensions Regulator as part of their annual scheme return form.

The government is also seeking views on ITR reporting, ahead of a proposed future consultation on mandatory reporting requirements. Trustees would be expected to calculate the 'implied temperature rise' or 'warming potential' of their investment portfolio, which could then be reported as a single, standardised figure. Statutory guidance would be produced to assist schemes with this reporting.

Carolyn Saunders of Pinsent Masons said: "The promise of a future consultation on Paris-alignment reporting and on measuring the warming potential of a scheme's portfolio raises the genuinely exciting prospect of being able to identify an easily-understood and consistent measure which will drive best practice".

In a foreword to the consultation, pensions minister Guy Opperman said that the pensions industry had the opportunity to "lead the way" on climate change reporting.

"I recognise that these proposals come as trustees are dealing with the impact of the Covid-19 pandemic," he said. "However, this is also a time of opportunity – as we 'build back better', trustees must turn their minds to the transition to the low carbon economy."

"Acting now to manage climate risks, and to take advantage of the opportunity of the low-carbon transition, will put schemes in a stronger position for the future. I believe that the proposals are proportionate, especially in light of the size and urgency of the threat – and the magnitude of the opportunities – posed to pension investments by climate change," he said.

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