UK Pension Schemes Under Pressure for Climate Impact Reporting

The mid-sized and smaller pension schemes in the UK are under tighter rules as new reporting regulations are requiring more detailed information.

The UK has been one of the fastest countries to adopt the Taskforce on Climate-related Financial Disclosure (TCFD) reporting requirements into law. This covers corporates, regulated financial institutions, and pension schemes.

Large pension schemes in the country have to report climate risks in line with TCFD guidance since last October. This is also part of the Occupational Pension Schemes Regulations 2021.

According to a law firm associate, the trend goes towards demanding more and more detailed information. He also added that:

“The aim is clearly a good one. That said, the regulations are detailed and it is going to be quite an uphill battle for smaller schemes to comply. There will be a challenge to find the time and resources.”

The requirements stem from the 2017 recommendations of the Financial Stability Board (FSB), which was a forum set up in the wake of the 2008 global financial crisis.

Pension Schemes as Responsible Stewards

Schemes in the UK have to disclose four measures in their accounting which include:

the total carbon emissions of all the scheme’s assets;
a measure of the intensity of such emissions per unit of currency;
a measure of the trustees’ own choices in relation to climate factors; and
a measure of the extent to which the scheme’s investments align with the aim of the Paris Agreement to limit global warming to 1.5°C.

The last measure has become compulsory only recently. This obliges trustees of the schemes with the Paris goals as their 3rd measure to find a new one.

Speaking on the recent change in reporting for pension schemes, the Department for Work and Pensions (DWP) Secretary noted that it’s to support trustees in their climate disclosures.

And so more work is necessary to refine methodologies and ensure consistent and robust reporting. This is vital to also ensure that schemes act as responsible stewards on behalf of millions of UK pension savers.

Commenting on this, Director of Policy and Advocacy at the Pensions and Lifetime Savings Association, Nigel Peaple said:

“As we enter the next phase of scheme reporting, it is important that the largest companies and asset managers meet institutional investors’ expectations… by enhancing their climate impact disclosure, as well as fully implementing their regulatory responsibilities within the TCFD regime.”

Getting enough information

Preparing TCFD reports started with larger pension funds last year. But it includes mid-sized operators this year, too, from £5 billion in assets under management to £1 billion.

This would be challenging for smaller pension schemes in the UK. One challenge is the ability of trustees to get relevant information from asset managers.

This may not be the case with listed equities and corporate credits. But it might be for emerging markets and private asset classes where confidentiality is a concern.

For instance, Hymans Robertson, a pensions and financial services consultancy firm stated that private market managers are failing to provide their clients with the information they need to manage climate risks.

The firm’s analysis revealed the industry-wide concerns about the incomplete disclosure of climate data.

Hymans also stated that the reporting of carbon emissions data is not yet commonplace. It said that:

“Managers of property and infrastructure funds are better prepared with just under half – (44%) for property and 48% for infrastructure – providing data on carbon emissions… In contrast, private equity and private debt managers were able to report significantly less information on climate issues – no private debt managers in the survey provided carbon emissions data.”

In line with this, the DWP remarked that it will review the existing thresholds for pension schemes’ climate-related reporting.

Taking into account (or ignoring) the risk

Reporting in line with the TCFD framework measures financial risk linked to climate change. But this is not the only concern for UK pension schemes.

Asset managers must also take into account stewardship and engagement. This means looking at ways how the financial sector can help in the race to net zero.

Some experts in this matter said that some schemes will find it impossible to meet the new TCFD reporting requirements.

While operators may see it as a once-a-year exercise, there’ll be more requirements on what the trustees need to do.

A worst-case scenario would be some firms will refuse to give trustees the TCFD information. And this will place their portfolio under question.

If such happens, any scheme that ignores climate change reporting also turns a blind eye to a major risk to pension savings. Most importantly, they’re missing out on vital investment opportunities.

Pension schemes in other countries have been diligent enough in disclosing their climate change data.

Allocating capital more efficiently

Regulators across the entire UK investment chain are committed to disclose climate information. And the government is making plans to reach its target of net zero carbon emissions by 2050.

This means that resilient pension schemes protecting savings from climate risk are within reach. But to achieve this, pension trustees should focus on their three major duties:

Exercise of investment powers for their proper purpose;
Take into account material financial factors (including transition and physical risks); and
Act according to the “prudent person” principle.

The prudent person principles means:

“Trustee investment powers must be exercised with the ‘care, skill and diligence’ that ‘a prudent person would exercise when dealing with investments for someone else for whom they feel morally bound to provide.”

Performing those duties will allow for a more efficient allocation of capital. Better yet, firms and investors alike will understand the financial implications of transitioning to a lower-carbon economy.

Finally, the International Sustainability Standards Board (ISSB) also has new climate reporting standards. Adoption of these standards will further place more pressure on climate reporting by pension schemes.

But the UK government has committed to promptly implementing the ISSB standards. The goal is to help pension scheme savers in their investment decisions.

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