UK’s largest pension schemes set for mandatory climate risk reporting

Schemes will be required to follow the TCFD's framework

In a speech delivered in Glasgow late on Wednesday (26 August), the Department’s Secretary of State Therese Coffey formally opened a six-week consultation on new climate disclosure rules for the UK’s pensions sector.

Under the proposed changes, pension schemes with £5bn or more in assets under management will be required to assess and publicly report on the physical and transition risks facing assets in their portfolios by the end of 2022. This requirement would affect around 100 schemes, Coffey said.

Smaller schemes which still have more than £1bn of assets under management would then be subjected to the same requirement by the end of 2023. Once this roll-out is complete, Coffey explained, some 70% of the UK’s pension sector, in terms of assets under management, would be covered. The proportion rises to 80% on the basis of numbers of schemes.

Failure to comply would result in penalties from the Pensions Regulator, including fines.

To ensure that disclosures are uniform, pension schemes will be mandated to follow the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The TCFD framework notably includes a recommendation for firms to conduct scenario analysis, mapping how different global temperature increases, including the Paris Agreement’s 2C trajectory, would impact their financial standing.

Beyond reporting, pension schemes will be encouraged to embed climate considerations into key facets of their operations, including governance, strategy and guidance.

“We are at a climate change crossroads – we must begin to look at green and sustainable assets as the investments for the future of the planet and of our pensions, and any scheme that has no plan for the transition is risking its future and the future of its members,” Coffey said.

“Pension scheme trustees are entrusted with our savings and finances for retirement – investments that bear fruit in 10, 20, 30, 40 years’ time. So it is only right that they take into account the long-term financial risks and they are also in the ideal position to benefit from that change to a sustainable, low-carbon economy.”

The consultation comes ahead of the introduction of the Pensions Bill.

Money talks

As expected, the DWP’s proposals stop short of introducing a blanket requirement for pension schemes to divest from fossil fuel companies or other high-emitting corporates of sectors. In a comment piece penned for The Telegraph earlier this year, Pensions Minister Guy Opperman said he “strongly believes” that divestment is the wrong approach. Instead, he wants to see pensions funds work with businesses in their holdings to improve their climate plans.

“Holding such [high-carbon] assets places trustees in an influential position to nudge, cajole or vote firms towards lower-carbon business practices,” he wrote.“The tactic of simply selling them to others without the same environmental concerns is counterproductive.”

Coffey built on this line of argument during her speech. She said: “Some will say we should go further and call for complete divestment. We see this overly simplistic approach actually making it harder to achieve net-zero.

“Pension schemes need to act in their members’ best interests, not take moral stances on their members’ behalf. And while some high-carbon firms will fail to make the transition to a low carbon economy, this is an opportunity to make companies transform their business models to be sustainable. Our reforms will ensure trustees are held more accountable than ever before.”

Nonetheless, the UK’s largest pension scheme in terms of membership, Nest, is voluntarily divesting from any large business that derives at least 15% of its turnover from these fossil fuels. Similar divestment initiatives have been announced by the Church of England and by several of the UK’s higher education bodies, including Oxford University, the University of Manchester and the University of Gloucestershire.

Cross-party MPs have also been calling for the Parliamentary Pension Fund, which currently has holdings in BP and Shell, to divest entirely from fossil fuels. Similarly, the Make My Money Matter campaign is garnering public support for divestment.

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Sarah George

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