UK pension providers must assess and report on risks posed by climate change in new plans

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New plans seeking to ensure that pension providers must consider the risk of climate change on their investments have been unveiled by the government.

The new proposals will ensure trustees are legally required to assess and report on the financial risks of climate change within their portfolios.

United Nations Special Envoy for Climate Action and Finance and the Prime Minister’s Finance Adviser for COP26, Mark Carney, commented on the announcement: “To achieve an orderly transition to net zero, managing climate risk and improving resilience needs to be at the heart of all financial decision-making.

“Corporates, asset owners, including pension schemes, and asset managers should use the Taskforce on Climate-related Financial Disclosures (TCFD) framework to disclose climate-related risks and opportunities.

“By requiring pension schemes to report against the Taskforce’s recommendations, the occupational pensions of over 24 million UK citizens, representing over £1.3 trillion of investments, can be managed to mitigate the risks from climate change and seize the opportunities from an economy-wide transition to net zero.”

Proposals are outlined in the Department for Work and Pensions’ new climate risk consultation, which includes:

  • Schemes embedding the recommendations of the international industry-led Taskforce on Climate-related Financial Disclosures (TCFD) into their organisation – including on governance, strategy, risk management, metrics and targets
  • Scheme scenario modelling to analyse the implications of a range of temperature scenarios for a scheme’s assets, to prompt strategic thinking about climate risks and opportunities
  • The requirement to report the greenhouse gas emissions of their portfolio
  • Compelling schemes to publish their report on a website and to notify pension scheme members via their annual benefit statement that the information has been published and where they can locate it
  • Schemes providing The Pensions Regulator with the web address of where they have published their Taskforce report via the annual scheme return form
  • Any complete failure to publish any Taskforce report to be subject to a mandatory penalty imposed by The Pensions Regulator.

The consultation will also signal an intent that schemes report on the extent to which their portfolios are aligned with the Paris Agreement, which called for the limiting of global (average) temperature rises to below 2°C (on pre-industrial levels).

The Department for Work and Pensions Pension Schemes Bill, currently before the House of Commons, includes powers to enact the measures outlined in the consultation.

The Government’s current plan is to consult on regulations in late 2020 or early 2021, pending confirmation of date.

The consultation runs until 7 October.