The Pensions Regulator has admitted there is some justification in recent criticisms of the climate-scenario analysis, included in the TCFD reports schemes must now complete.
Currently 90 out of 350 schemes have published these reports with a further 180 due to publish by November this year.
In an update sent to schemes today, TPR has set out steps as to how trustees can help drive change on this issue and ensure this analysis is “decision-useful” in future.
TPR’s climate and sustainability lead Mark Hill says recent reports “starkly highlight the limitations of current models and scenario analysis”.
He adds: “They rightly question the validity of some published outcomes, which appear to seriously underestimate the financial risk from climate change and are at odds with the established earth and climate science.”
As Hill pointed out that some of these scenario analysis reports published to date predict only a minor reduction in returns if global temperatures increased by 4°C. This, Hill points out, appears to be at odds with scientific consensus which is predicting “catastrophic” biodiversity loss, the collapse of the insurance sector, increased migration and potential resource wars in such circumstances.
Hill says these problems present an opportunity to “step back” and “collectively consider what needs to be done to address the shortcoming in the available models and approaches… if we are to create truly decision-useful climate scenarios.”
Hill called for a new consensus to emerge. He adds: “Following the recent criticism and concern, it’s clear a degree of revolution, not evolution is needed. Trustees need effective tools and approaches to adequately identify and respond to risks (and opportunities) to avoid savers being left exposed.”
He adds that this currently can create difficulties for trustees: “Unlike other models and approaches trustees are familiar with, such as longevity and asset-liability models, the range of uncertainty in climate change model outputs is extremely large.”
He adds that it is important this reporting does not become a tick-box exercise. “It’s essential trustees appreciate this reality and feel confident to question and challenge their advisers and the output from climate scenario analysis.”
He adds: “TCFD reporting provides a consistent framework to disclose against. It will not in itself address the systemic risk posed by climate change. A more forward-looking approach including transition planning will be needed.
“For trustees, the focus must be on informed decision making leading to accelerated action on risk management. And, we mustn’t forget the investment opportunities, which must be at the heart of effective transition planning.
“Decision-useful climate scenarios are a key part of this. It’s well understood there are limitations with some elements of data, analytics and modelling. It’s likely there always will be. However, the decision usefulness of outputs will improve as industry knowledge and understanding develops.
“That said, the window for action is narrowing rapidly. Future change is unlikely to be incremental and some changes, for example, market re-pricing, could happen rapidly. TPR is committed to supporting and helping trustees as collectively, we face this uncomfortable reality.”
TPR adds that any schemes who have completed this analysis will have done so using using exploratory climate scenarios which have been challenged recently.
Although trustees may not be formally required to undertake scenario analysis the following year, the regulator said it expected schemes to review their most recent analysis and consider undertaking more, in light of these recent developments and concerns.
It says: “Triggers for new analysis include the availability of new or improved scenarios or modelling capabilities or a change in practice or trends. Where trustees do not undertake new analysis, they should explain why in their TCFD report.”
