The pensions industry has welcomed The Pensions Regulator’s (TPR) recently published Climate Change Strategy, praising its integration of covenant, actuarial and investment risk.

TPR's strategy, published yesterday (7 April), set out how it will support pension trustees through upcoming changed in climate-change related regulations and how it will enforce new requirements.

LCP partner and head of responsible investment, Claire Jones, said the strategy provides “welcome clarity” on TPR’s expectations and plans in relation to climate change.

“It underscores the importance of this topic for pension scheme trustees and confirms that it’s a topic TPR expects them to prioritise,” she continued.

“It is reassuring to hear that TPR is working with government departments and other regulators to ensure a joined up approach across the investment chain.

“Trustees should note the emphasis on stewardship and, for defined benefit schemes, the need to integrate the management of covenant, actuarial and investment risk from climate change.”

Lincoln Pensions managing director, Michael Bushnell, said the firm “thoroughly welcomed” TPR’s recognition that integration of covenant, actuarial and investment risk is key to successful outcomes.

However, he argued that the regulator’s current approach “fails to fully recognise that trustees of DB pension schemes have a unique role as the only investor with a material reliance on one counterparty, their employer covenant, with a consequently higher level of risk and responsibility in how that employer faces the climate crisis”. 

“Trustees may quickly find themselves at the forefont of influencing corporate sustainability in both their sponsors and their investment portfolios, and we look forward to greater clarity on how DB scheme trustees should manage these issues in upcoming amendments of the Code of Practice and Trustee Toolkit," he added.

Interactive Investor head of pensions and savings, Becky O’Connor, said that the strategy should give a “strong push” to schemes that need extra impetus to act on climate change risk.

“It is the ‘stick’ in the ‘carrot and stick’ approach and sets out clear expectations, being mindful that some schemes are further ahead than others,” she stated.
 
“Trustees must also listen to scheme members – the demand-led, ‘carrot’ side of the equation, and what they want their pensions to be invested in.
 
“Where a pension is invested not only has a financial bearing on the investor’s retirement pot size, it also has an impact on the world they will retire into.
 
“The language around climate risk, including in this strategy, is subtly changing, becoming less about financial risk only and more about the world we want to live in. However the impact of climate change risk on financial outcomes for members appears to remain the bigger priority than the imperative to help prevent catastrophic climate change for the planet’s own sake. The good news is that in reducing financial risks to members, pension schemes can have a huge positive influence on global CO2 emissions.
 
“So as well as understanding their obligations in relation to things like the Statement of Investment Principles and climate-related financial disclosures, pension schemes must consider the values of the end investor. Many already do but there’s still plenty to do to engage investors on the real world impact of their money.”

The strategy will provide “welcome incentives and tools” to encourage trustees to obtain data and create the investment processes required to “effectively respond” to the climate crisis and manage climate risk, according to Cardano UK group head of sustainability, Will Martindale.

He added: “As a result, we expect to see major progress in climate-related financial governance, reporting and investment decision-making. It is also encouraging to see TPR has recognised in its regulatory approach that the integration of covenant and actuarial risks, along with investment risks are key to successful outcomes.”

PLSA deputy director - policy, Joe Dabrowski, concluded: “The PLSA strongly supports TPR’s view that addressing climate risk is intertwined with pension schemes’ fiduciary duty to act in the best interests of their members and should be a mainstay of good investment governance.

“This was a key factor for our Changing Climate report – published last year – which drew on our discussions with more than 80 pension industry representatives and demonstrated the near universal desire among pension funds to invest in a climate-aware way.

“As TPR has emphasised in its strategy document today, the pension industry is well placed to continue to influence the debate and extend the governance of climate risks to the corporate sector.

“TPR’s commitments to providing guidance on the TCFD regulations, updating the trustee toolkit and providing relevant training to staff are also very welcome. We look forward to working with the regulator to ensure the guidance is suitable for schemes and supports them to achieve best practice.”

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