The pensions industry has broadly welcomed the proposals outlined in the Department for Work and Pensions’ (DWP) consultation on assessing and publishing climate risk disclosures, but warned that trustees may face challenges in implementing the changes.

The consultation proposes that larger pension schemes and authorised master trusts assess and publish climate risk disclosures in line with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations by the end of 2022.

Dalriada Trustees professional trustee, Vassos Vassou, said that the consultation “demonstrates the direction of travel of the industry”.

“Trustees have had to deal with lots of recent changes over ESG and climate change, but this goes one step further by asking the largest schemes to report against the TCFD framework,” he continued.

“The investment managers of those schemes will in turn have to be supportive of what the trustees require. This will help change the behaviour of investment managers and will also put a spotlight on the trustees who will have to show what actions they have taken on climate change.”

With the industry shift to more responsible investment strategies, Pensions and Lifetime Savings Association (PLSA) head of DB, LGPS and standards, Joe Dabrowski, noted that having a “clear and common” framework across the pensions sector to assess and report climate investment risk was “essential” in managing the impact of climate change on member outcomes.

Institutional Investors Group on Climate Change CEO, Stephanie Pfeifer, added: “It is a move that will be welcomed by the multitude of funds that already understand the importance, value and urgency of ensuring robust governance and reporting on climate-related risks.

“Managing climate risk and capitalising on the opportunities offered by the transition to a net zero economy is in the long-term interest of all pension funds, the pension holders they serve and our collective ability to tackle the climate crisis."

Despite the positives, some industry experts warned that trustees will face challenges in implementing the potential changes, especially as they are already dealing with the impact of the Covid-19 crisis.

Sackers partner, Ralph McClelland, noted that while many schemes are already “some way down the road” on assessing and publishing climate risk on their investments, “implementing the proposals could pose challenges for trustee boards, particularly those with smaller schemes”.

Isio partner, Patrick Race, echoed this sentiment, saying that it will be “interesting to see” how the new requirements will in time translate to smaller schemes, “which already tend to be behind the ESG curve due to resource limitations”.

“As the minister acknowledges, this will mean extra work for already busy trustees, many of whom are dealing with the major implications of the global pandemic on their investment portfolios and sponsors,” he added.

“While we fully agree with the requirement to comply with the TCFD recommendations, we are likely to be looking for clarity on how some of the disclosures should be standardised across the industry. Disclosure will mean scheme comparisons and member questions - it will be unhelpful if arguments over methodology around 100 trustee tables distract from the positive thrust of the proposals.”

Although there were warnings that the changes would create extra work for trustees at an already busy time, the proposed disclosure requirements were deemed necessary and welcome by most.

LCP partner and head of responsible investment, Claire Jones, said that the changes would mean that climate change can no longer be seen as “a bolt-on to ESG considerations” and although schemes and employers are busy dealing with Covid-19 implications, that was “no excuse” to defer action on climate change.

“The proposals will require a step-change for many schemes, so those expected to be within scope should review their climate approach against the proposed requirements and start addressing any gaps, particularly in relation to scenario analysis, metrics and targets,” she noted.

Hymans Robertson head of responsible investment, Simon Jones, concluded: “Pension funds will only contribute to the mitigation of climate risk through the reallocation of capital or by driving changes in behaviour.

“This continued focus on climate risk is welcome and we are particularly encouraged that this consultation looks beyond just disclosure to the underlying actions that trustees are expected to take in developing their approach. Looking beyond the risks associated with climate change to the potential opportunities to influence or create change must become a part of asset owners’ mindsets.”

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