Pension trustees are taking proactive steps to address climate risks and opportunities, according to a recent review of climate-related disclosures, but The Pensions Regulator (TPR) urges further improvements while some experts call for a focus on ‘real-world impact’.
TPR published its second annual review of climate-related disclosures, revealing that pension trustees are acting to address climate risks and opportunities.
It found that most 60 per cent of reports in TPR’s sample set net zero goals by 2050 or earlier, as required since 2022 for schemes managing more than £1 billion in assets. TPR’s analysis of these reports seeks to improve industry norms in light of these new demands.
The report offers thorough commentary on best practices and opportunities for improvement in each reporting part for trustees and preparers of climate disclosures.
It draws attention to the steps trustees are taking to mitigate climate risk, like upgrading their investment plans and engaging with top carbon dioxide emitters. It advises them to take into account context, materiality, generic wording, length and the use of plain language summaries when writing reports.
It also highlights how crucial it is to build action plans for continuous progress monitoring and to provide updates on changes in between reports.
TPR climate and sustainability lead Mark Hill says: “Climate change disclosures should be the product of good risk management.
“That’s why we want schemes to know what ‘good’ looks like and improve their management of climate-related risks and opportunities.
“Even if not yet in scope for disclosures, schemes should act now and read this report to help them in their strategic decision-making.”
LCP senior investment consultant Laasya Shekaran says: “The goal of climate regulations for investors should focus on real-world impact. It is important for pension scheme trustees to bear this in mind when producing their Taskforce on Climate-related Financial Disclosures (TCFD) reports so that TCFD reporting does not become a ‘tick-box’ compliance exercise. Indeed, effective reporting is best driven by actions.
“The feedback provided by TPR is useful to help trustees focus their reports on being more meaningful, thereby driving forward positive real-world change.
“TPR notes the importance of using stewardship as a risk management tool by engaging with high-emitting holdings. It also addresses and agrees with some of the commentary from the IFoA and Carbon Tracker that has challenged the scenario analysis undertaken by pension schemes in their TCFD reports.
“Usefully, the TPR acknowledges that climate scenario analysis has limitations, often not capturing the full extent of physical risks and tipping points. Pension scheme trustees are encouraged to apply qualitative overlays to their scenario analysis to better understand the full potential impact of climate change and, therefore, take action to address climate change risks.
“TPR recognises the importance of pension scheme covenant, noting that some of the reports it reviewed had omitted appropriate assessments of the climate risks and opportunities that their sponsors face.
“We encourage trustees to use this feedback as an opportunity to help better inform their real-world climate-related actions.”