Amended guidance on disclosures gives pensions funds tools to manage risks and drive real-world decarbonisation.
Data gaps shouldn’t prevent large pension schemes from beginning to measure and disclose the extent of portfolio alignment with the Paris Agreement, said the UK government following its consultation on climate and investment reporting.
The Department of Work and Pensions (DWP) outlined changes to statutory guidance to provide “further clarity” to pension trustees on how to report on portfolio alignment, but said there was no case for delay.
“Although present data coverage may not be perfect, it is improving rapidly, and our requirements will help to accelerate this process significantly,” said a statement by DWP Secretary of State Therese Coffey and Pensions Minister Guy Opperman.
In October last year, the DWP sought views on proposals to amend the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021, requiring reporting on pension schemes’ alignment with the Paris Agreement’s 1.5°C temperature pathway.
According to the consultation, larger pension schemes (over £5 billion in AUM) will be required to calculate and disclose this metric, including it within their mandatory Task Force on Climate-related Financial Disclosures (TCFD) report.
The DWP consultation followed the release of updated guidance by the TCFD including a range of metrics for assessing climate-related financial impacts. Sixty corporate schemes, trade bodies and asset managers responded to the consultation.
Data availability concerns
While largely supportive of the proposals, which are due to come into force for large schemes in October, some respondents highlighted data availability concerns, particularly for asset classes beyond listed equities and fixed income.
The DWP noted that the introduction of new reporting frameworks, including the UK’s planned Sustainability Disclosure Requirements (SDRs) and the climate and general sustainability standards published by the International Sustainability Standards Board (ISSB), will bolster overall data quality. Timelines for introducing SDRs was recently thrown into doubt when the measure was not included in the Queen’s Speech, outlining the government’s legislative agenda, last month.
“Data availability shouldn’t stop trustees from beginning to measure carbon emissions, provided there is a recognition and understanding of the data limitations, for example where assumptions are being made about emissions when data is unavailable,” said Karen Shackleton, Founder of Pensions for Purpose. “Data is improving all the time and we are already seeing an increase in the number of companies reporting on Scope 3.”
The Institutional Investors Group on Climate Change (IIGCC) noted that “targeting a single number to improve a portfolio’s temperature alignment” (i.e., 1.5°C) “could incentivise the wrong behaviours” and result in schemes merely divesting the achieve alignment, rather than trying to engage to transition assets.
“There is a great danger that pension funds can focus too much on publicly declared goals and lose sight of what they are trying to achieve,” said Shackleton. “This is why we place a lot of importance on articulating investment beliefs, supported by a clear investment thesis. Most of the funds that we have worked with have recognised the importance of stewardship and discuss this regularly at committee meetings.”
Concerns were also raised that schemes would be required to report on their portfolio alignment before asset managers, potentially meaning they may not be able secure all the information needed from their service providers.
The DWP conceded that it is “not an entirely optimal outcome for trustees to be required to report against alignment metrics before asset managers”, but added that this isn’t a “strong enough reason for delay”.
Amendments to statutory guidance
In its response, the government said it would make several draft amendments to statutory guidance, including one to further emphasise that trustees should describe the methodology and data assumptions used when disclosing their portfolio alignment metric. “In the interest of consistency, trustees should be clear about the methodology that underpins their portfolio alignment metric whether they use binary measurements, benchmark performance or implied temperature range models,” it said.
Responding to proposals for a more principle-based approach in statutory guidance, the DWP backed a prescribed list of TCFD-aligned metrics “which still provides trustees with flexibility to select a portfolio alignment tool which reflects their specific circumstances, including their investment strategy and governance capacity”.
The consultation response was coupled with stewardship guidance to help trustees to more aggressively challenge asset managers on their voting.
“Our stewardship guidance also clarifies our expectations on stewardship, and highlights where disclosures can align with reporting to the UK Stewardship Code,” the DWP statement said.
Will Martindale, Group Head of Sustainability at fiduciary manager and pension provider Cardano, welcome the additional focus in the finalised proposals on alignment metrics and stewardship-related disclosure. “The new disclosures should give trustees additional tools to both manage the financial implications of climate change and direct capital in ways that deliver real-world decarbonisation,” he said.
Pension schemes’ climate-related reporting requirements are widely expected to be followed by a broader range of sustainability-related disclosure requirements. The framework currently being developed by the Taskforce on Nature-related Financial Disclosures (TNFD) is being designed along similar lines as the TCFD’s reporting recommendations in order to be easily adopted into regulatory regimes.
“I would expect DWP to look to extend climate and investment reporting for pension funds to include biodiversity at some point in the future. Feedback from our pension fund members is that they would like the regulations to embrace both TCFD and TNFD into one set of reporting requirements, rather than two separate sets of regulations, and that is something for DWP to consider,” said Pensions for Purpose’s Shackleton.
The DWP has also consulted on how social risks and opportunities should be considered by occupational pension schemes, but has yet to issue proposals.
“To date, there has been less regulatory attention to social risks and opportunities. But by implementing their commitments to social risks and opportunities with sufficient scale and depth, UK pension funds can accelerate the attention to social issues through the investment chain – here in the UK and the international markets in which we invest,” said Martindale.