Reporting on climate: a challenge but an opportunity

Over the coming months we expect around 100 schemes to publish their first reports produced in line with the Climate Change Governance and Reporting Regulations.

We know significant work has been carried out by many trustees and some have faced challenges relating to:

  • the availability, quality and consistency of data
  • the identification and selection of suitable scenarios
  • striking the balance between the level of disclosure necessary to meet the requirements in the regulations and the expectations set in the Department for Work and Pensions’ (DWP) statutory guidance, while keeping the disclosure accessible and useful to readers

We also understand some trustees, possibly influenced by experience with chair’s statement disclosures, have concerns about how the published reports will be used and reviewed.

Trustees need to address systemic risks

Climate change has the potential to cause material financial consequences to savers’ retirement outcomes. It’s also a risk which has not been adequately recognised by all investors, where the impacts are rapidly crystallising and where the time to mitigate the most negative impacts is limited. As the Intergovernmental Panel on Climate Change’s working group stated in February:

“The scientific evidence is unequivocal: climate change is a threat to human wellbeing and the health of the planet. Any further delay in concerted global action will miss a brief and rapidly closing window to ensure a liveable future.”

A climate transition forecasting consortium commissioned by Principles for Responsible Investment in 2018 called The Inevitable Policy Response, forecasts a continued acceleration in climate policy to 2025 with the potential for increasingly forceful, abrupt and disorderly impacts. Economic and financial systems will change, which in turn will create material risks and opportunities for investors. While the pace, extent and timing of any change remains uncertain, it is inevitable as we adapt to some form of new ‘normal’. This means waiting for perfect data, built from the bottom up of the (global) investment chain is not appropriate. The time for action is now.

The purpose of disclosures

The DWP’s statutory guidance indicates that:

  • the principal purpose is to ensure trustees are thorough and rigorous in taking the action required under the regulations
  • disclosure represents the output of the processes they have put in place and actions they have taken to understand and address the risks and opportunities that climate change poses to their scheme
  • the disclosure should enhance transparency towards members, TPR and the pensions sector generally resulting in an improvement in accountability and the development of future regulation and best practice

We appreciate there may be some current practical challenges in drafting the disclosures, however, trustees should seek to demonstrate that they have acted to fully understand the range of climate-related risks and opportunities their scheme is exposed to and have taken action to address those – where proportionate to their scheme’s arrangements and other risk exposures – explaining the outputs of their analysis and the outcomes of their actions.

What TPR will do with the disclosures

Over the coming months, we will review Taskforce on Climate-related Financial Disclosures (TCFD) reports published by schemes in scope of the regulations. We will be mindful of the challenges and concerns trustees have. We know for many trustees, climate is a substantial body of work, with a steep learning curve in terms in of knowledge, regulatory requirements and emerging and evolving market practices. The outcome of our review of the published reports will also be used to provide high-level observations and feedback to in-scope schemes where we have an existing supervisory relationship.

The review will also inform trustees and advisers of smaller schemes not in scope but who wish to improve their management of the climate-related risks and opportunities.

It will also inform the DWP’s review of the regulations in late 2023, which will include a review of the effectiveness of the regulations and the range of schemes to which they should apply and meet two commitments in our climate change strategy where we undertook to review TCFD reports and share best practice examples (with the DWP) and carry out a thematic review of scheme resilience to climate-related scenarios.

We do not anticipate it will be necessary to issue any penalty notices to trustees of schemes that publish their TCFD reports in the first wave, other than:

  • where the report has not been published – this will result in a mandatory penalty of at least £2,500
  • where it is clear the trustees have not made a genuine effort to comply with the regulations – this would result in a discretionary penalty of up to £50,000

If a scheme is sectionalised, the report should be produced and published for the scheme as a whole.

Costs should be considered in context

We appreciate the cost and resource concerns some trustees have, however these should be seen in context.

While the first-year costs may be high, these costs will reduce as data, analysis and knowledge improves and in future, resource requirements should also reduce.

Significant elements of the disclosures made around the core TCFD pillars, in particular, the governance and risk management pillars, are more likely to evolve over time rather than significantly change from year to year – if they have been set up correctly at outset. Similarly, we expect other elements of the core TCFD disclosures to overlap to an extent from year to year. This will minimise the cost burden on schemes when measured on a rolling basis over a period of years.

And the risks and costs associated with climate change have not been sufficiently recognised and accounted for historically by industry and by society more generally. All investors and all of society will pay catch-up costs as we address the risks and opportunities presented by climate change.

Ultimately, we believe the disclosure requirements should be seen not only as an exercise in compliance but as an exercise in risk (and opportunity) management, which should lead to improved outcomes for scheme members.

Also, for some schemes, where limited work on climate-related issues has been carried out previously, the work sitting behind and supporting the disclosures should also offer an opportunity for significant value to be added by enabling trustees to make better informed decisions in relation to climate risks and opportunities.

Looking to the future

We anticipate we will take a collaborative approach to the second wave of TCFD reporting, when the net relevant assets threshold for non-authorised schemes reduces to £1 billion on 1 October. However, we will refine our approach and expectations of trustees based on our experience of our review of the first wave of TCFD reports and in line with market and regulatory developments.

Climate change is one of the defining issues of our generation. As industry knowledge, data and analysis techniques develop and global policy responses evolve, best practices will emerge, and regulations will evolve.

However, climate and sustainability are intricately interlinked. Long-term success in climate adaption and in building climate resilience requires sustainability to be accounted for. In the Greening Finance Roadmap [PDF], published last October, the government set out plans for Sustainability Disclosure Requirements (SDR) to be imposed on certain occupational pension schemes and asset managers. Details of the proposals have yet to emerge, but industry expectations are they will:

  • set similar expectation on schemes as TCFD reporting in relation to governance, strategy, risk management and the use of metrics and targets
  • integrate SDR requirements with existing TCFD requirements

While this has the potential to add further requirements on schemes in the short term, the data challenges should be reduced by the UK’s adoption of International Sustainability Standards Board standards. These standards will form a core component of the SDR reporting framework and will improve data coverage and help schemes obtain high quality, transparent, reliable and comparable reporting by companies and asset managers on climate and other sustainability matters.

However, ultimately the intention of all these requirements is to ensure risks and opportunities are better managed and improve member outcomes.

By David Fairs, Executive Director of Regulatory Policy, Analysis and Advice