At the end of October 2021, the Pensions Regulator (the Regulator) published a report about climate adaptation.
The report shows (i) the risks from climate change relevant to occupational pension schemes and (ii) how the Regulator addresses them.
From the report it appears that pension schemes do not give enough consideration to climate change risks which is negatively reflected in their investment performance.
What are the climate-related risks for occupational pension schemes?
There are three different types of risks that can occur because of climate change and these are:
Physical risks: which are the risks connected with the average temperature going up (for example flooding or fires that threaten physical assets and disrupt supply chains);
Transitional risks: these risks may arise because of the change towards a low-carbon economy; and
Litigation risks: these are potential risks that pension schemes may face if they fail to adapt to physical and transitional risks.
What are the Trustees’ requirements in relation to climate-change?
Some trustees of occupational pension schemes have to:
prepare a Statement of Investment Principles (SIP) which:
should include a policy on environmental considerations including climate change, which they consider financially material;
must include trustees’ stewardship policy of the rights attaching to the investment and trustees’ policy on how non-financial considerations are considered when investment decisions are made; and
should explain the trustees’ policy on engaging with asset managers.
produce the Implementation Statement where they have to describe how they have put SIP policies into practice if their scheme provides money purchase benefits; and
under the Pension Schemes Act 2021, which adapts the recommendations for trustees from the Taskforce for Climate-related Financial Disclosures (TCFD), (i) have an oversight of climate-related risks and opportunities (ii) work out the scheme’s carbon footprint by calculating the greenhouse gas emissions of the investment portfolio and (iii) set a climate-related target and publish a report on their work.
The Regulator’s approach
The report clearly shows that there are too many climate change related risks and that not enough trustees of both Defined Contributions (DC) and Defined Benefits (DB) schemes are paying enough attention to these risks.
The way the Regulator is planning to address this problem is to engage with the pension schemes. The Regulator’s plan is:
to set clear expectations so the standards required are clear and easily adopted;
identify climate change risks early by, for example, carrying out a thematic review on scheme resilience to climate-related scenarios or recommending trustees sign up to the 2020 UK Stewardship Code;
to improve compliance through supervision and enforcement; and
to work with their regulatory partners and stakeholders to guarantee a more comprehensive and consistent approach.