UK Pension Schemes Wrestling with Opportunity to Put Climate First

Even with a time extension, schemes may struggle to implement changes in time. 

UK pension schemes have an opportunity to “go beyond compliance” with Task Force on Climate-related Financial Disclosures (TCFD) guidelines by embedding climate risk in their investment strategies and policies, according to lawyers from Eversheds Sutherland.

“If pension schemes are putting all these resources into making sure they are aligned with TCFD guidelines, then this may influence their wider ESG strategy and encourage schemes to become more ambitious in this area,” explained Harriet Sayer, Principal Associate for Eversheds Sutherland.

“Making TCFD reporting mandatory will hopefully get pension schemes to refocus their existing policies,” added Mark Latimour, Partner at the firm. “I’m hoping to see that knock-on effect, even if I’m not necessarily convinced schemes will introduce broader voluntary ESG reporting.”

Last year, the UK Chancellor of the Exchequer Rishi Sunak announced that UK asset owners and institutional investors across seven categories will need to adhere to a five-year plan for mandatory climate-related financial disclosures.

Pension schemes with more than £5 billion AUM were originally expected to provide mandatory disclosures from early 2021, whereas occupational schemes with over £1 billion AUM and Financial Conduct Authority-regulated (FCA) pension providers would be brought into the scope from 2022.

Not enough time?

Eversheds Sutherland’s work with pension fund clients suggest more work remains be done in order to be compliant within the next 12 months.

“Most pension schemes are still in the scoping stage of compliance, meaning they’re still looking at what they have to do and how they will do it,” Latimour said.

More time to comply would be beneficial, particularly for smaller pension schemes that don’t already have the resources or governance structures in place, he noted.

However, UK Pensions Minister Guy Opperman has already responded to calls for a time extension, giving all schemes an additional seven calendar months from their individual year-end dates to publish their TCFD reports. This follows the FCA introducing initial ‘comply or explain’ rules in December last year.

While this time extension should allow pension schemes to get the basic reporting framework in place, Latimour emphasised that “it’s probably more realistic for pension schemes to look at TCFD compliance as a 24-month process”.

“Minimum compliance with TCFD is still a lot of compliance,” he said. “I hope the UK government is somewhat sympathetic to the first round of compliance reports, simply because of the huge amount to be done within a short period of time.”

In particular, collating the necessary accurate and comparable climate-related data needed for pension schemes’ TCFD reports remains a challenge, Sayer pointed out, suggesting industry bodies could provide examples of best practice.

“The fact that TCFD is being applied right across the UK economy means there’s a greater impetus towards standardising ESG data in the future,” she said.

The government has provided non-statutory guidance on managing and reporting climate-related risks in line with TCFD guidelines, produced by a cross-government group, the Pensions Climate Risk Industry Group (PCRIG).

Asset managers need to provide ESG data

In a speech to the Pensions and Lifetime Savings Association (PLSA) last week, Opperman said that asset managers across all markets need to “start spending their resources and their modelling capabilities” in order to provide relevant ESG data that can be used for TCFD reporting.

“[They] cannot just say they do not have the perfect information or are asking clients to wait for another five years,” Opperman said.

The Pensions Minister further noted that the pension system needs to be simplified and made more accessible to the public. He called for easier access to members’ pensions online and for written statements on ESG to be less opaque.

TCFD reports should therefore aim to be delivered in a digestible, clear format in order to encourage more member-driven interaction, Sayer said.

“The TCFD mandate may prompt improvements in engagement with members. When delivering such a fulsome, rigorous report, I think members will be more appreciative if it’s explained in a way that’s accessible and clearly outlines what this all means for them,” Sayer explained.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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