TPR has published its climate change strategy setting out how it can help trustees meet the challenges of climate change. Climate change impacts all parts of the economy feeding through to potential investment returns. If trustees ignore climate change, then DC scheme members may miss out on the best outcomes and the funding levels of DB schemes could be impacted. DB scheme trustees should also be mindful of how climate change impacts the covenant strength of the sponsoring employer.
In setting its strategy, TPR has been guided by the government’s Green Finance Strategy and the push for net zero carbon emissions by 2050. This will require climate and environmental factors to be integrated into decision-making across all sectors and asset classes. The Taskforce on Climate-related Financial Disclosures(TCFD) has drawn up recommendations for how this can be achieved. The Green Finance Strategy sets out an expectation that large asset owners should disclose in line with the TCFD recommendations by 2022.
With regard to pension schemes, the Pension Schemes Act 2021 introduced regulations requiring schemes with assets of at least £5bn and all authorised master trusts and collective DC schemes, to adopt governance requirements and report in line with the TCFD’s recommendations. Compliance is required by 1 October 2021. Schemes with assets of at least £1bn must comply by 1 October 2022 and the government has stated that it will review whether smaller schemes should comply in 2024. Under the regulations, trustees will have to work out the scheme’s carbon footprint by calculating the greenhouse gas emissions of their investments. They will have to set out climate related targets and disclose their findings and details of their governance arrangements.
The climate change strategy sets out three aims as follows:
These aims are explored further below.
To create better outcomes in later life for workplace savers by driving trustee action on the risks and opportunities from climate change.
Primarily, TPR will regulate and enforce the climate-change requirements placed on trustees and
will do this through the following objectives:
It wants to see schemes publish their SIP, implementation statement and, for those in scope, disclose their TCFD report. Where they do not, and it is appropriate to do so, it will take enforcement action, which it may publicise.
It will publish guidance outlining its approach to the new TCFD regulations. it may take enforcement action against those not meeting legal duties.
To seek to influence debates around pensions and climate change.
In order to understand and influence the climate change debate, TPR will pursue the following objectives:
It will use its communications tools to promote this strategy, call on its regulated community to meet its expectations in line with objectives 1 and 2, and be clear about the steps it has taken to contribute to climate goals as a business and enhance its credibility.
It will work with government, key stakeholders and other financial regulators, participating in groups on climate change and stewardship to influence debate, align plans where relevant, and sharing insights. It will continue its membership of cross-government groups.
As a business, to take part in the transition to net zero.
TPR aims to reduce its own environmental impact and will set a 2030 net carbon zero emissions target.
TPR will focus on four areas as follows:
Setting clear expectations
As stated earlier, the new requirements under the Pension Schemes Act 2021 only apply to larger schemes. TPR estimates that 60% of DB scheme assets will be covered by the end of 2023. However, the impact of climate change on some employers could be significant, and integration of covenant, actuarial and investment risk is key to successful saver outcomes. As such, its guidance will specifically consider how to take account of the impact of climate change in Integrated Risk Management (IRM), which will help to engage smaller schemes more with climate-related risks.
The Trustee Toolkit will be updated to include content on climate change.
Identifying risk early
This will include examining how the larger schemes are complying with the new regulations and publishing its findings. It will also review a selection of the new implementation statements and publish its findings.
Driving compliance through supervision and enforcement
TPR expects all schemes, regardless of size, to be able to achieve compliance with the basics, including those outlined in objective 1 above. The quality of this reporting can be an indication of the quality of scheme governance.
To help identify instances of non-compliance with disclosure obligations, it will implement new regulations by adding questions to the scheme return, requesting the web addresses for climate change-related documents as laid out in objective 1. It will also publish, on its website, an index of the web addresses of schemes’ SIPs.
Working with others
Amongst other things it will participate in cross-government groups, regulators forum on climate change and in the Stewardship Regulators Group.