Simon Jones, Head of Responsible Investment, Hymans Robertson says: “We welcome the considerable efforts the DWP has made to create legislation and guidance that recognises the important role UK pension schemes need to play in combatting climate risk, and in supporting the UK Government in its ambitious, legally binding climate targets. It is evident the DWP has considered a diverse range of stakeholder feedback, and we are pleased with the majority of amendments made to the draft regulations which seek to clarify and simplify, and which include a number of our own suggestions.
“Of note is the deferral by one year of the requirement for trustees to gather and report on Scope 3 emissions data. The need to disclose more comprehensive emissions data from the second year of the new requirements being in place clearly places the financial services industry on notice that pension funds require this information, but gives additional time for data providers to enhance and finalise their Scope 3 data reporting capabilities.
“We are also encouraged by the DWP’s message that climate change is one of many wider environmental, social and governance factors that trustees should be considering within their integrated risk management processes. Whilst climate change is a significant financial risk and clearly warrants significant attention, trustees need to continue to ensure that they address other ESG issues, many of which could be exacerbated by the ongoing impact of climate change.
“Climate risk and opportunities that will arise through the transition to a low carbon economy continue to evolve. This legislation builds in a degree of pragmatism and recognition that individual schemes are best placed to assess their own climate positions. The inclusion of a review of this legislation and guidance in 2023 gives the DWP opportunity to reflect on the efficacy of its proposition. Retaining a degree of flexibility as data and protocols evolve, and addressing any initial material concerns from participants, is an important component of generating the best long-term outcome.
“On balance, we consider the finalised regulation and guidance a powerful tool that will help pension scheme trustees better understand the risks and opportunities climate change poses. We are already working with our clients to address climate risk within their investment and funding arrangements and we look forward to supporting our clients implementing these strengthened requirements.”
Will Martindale Group Head of Sustainability at Cardano commented: “We warmly welcome the Government’s publication of the proposed pension climate reporting legislation embedding TCFD requirements in pension fund disclosures. Despite recent momentum, government action to tackle the climate crisis has so far been highly insufficient. Climate change is now a widely established and socialised concept within financial markets – both as a financial risk, due to transition and climate-related risks, and an investment imperative, because the way in which we direct capital will support (or hinder) climate targets. TCFD supports financial market participants in organising and standardising climate disclosures, effectively allowing comparison of green apples with green apples, will only lead to better investment decision-making.
“In our experience, many UK trustees have already embraced the spirit of the regulation – and have taken steps to understand the use of climate-related metrics, scenarios and target-setting. The regulation rewards first-movers, levels the playing field and – most importantly – raises minimum standards. By implementing their commitments to addressing climate change with sufficient scale and depth, UK pension funds can lead the world in accelerating the transition globally.
“At Cardano, we support the Paris Climate Agreement of limiting global warming to +1.5°C versus preindustrial levels. We do this by committing our investment portfolios to net zero carbon emissions by 2050. This is our default position – in our fiduciary management, our advice and our liability driven investments. The proposed TCFD reporting requirements for UK pension funds help underpin our climate change commitments.
“The climate crisis is the most fundamental challenge the global economy faces. The measures taken by the Minister are a welcome step forward.”
Bruno Bamberger, Solutions Strategist, AXA Investment Managers: “We welcome this latest guidance from the DWP. The two greatest challenges UK pension schemes currently face are climate risk and cashflow negativity.
“Quantifying these risks is a challenging task as multitude of data and KPIs exist and therefore care must be taken by the Trustees on which ones to adopt, including adapting or changing them where required as measurement techniques improve in the future. We believe that combining multiple data points with qualitative assessment and engagement is the most appropriate way to build a portfolio that manages long-term risks of cashflow and climate. We also believe clients should be requesting from their managers a climate dashboard to assess not only their current emissions but how aligned their portfolio is to the Paris Agreement.
“As well as metrics such as absolute emissions and carbon intensity, we are also working with clients to report and monitor on both climate value at risk and their longer-term carbon intensity pathway. This allows them to better understand and monitor different aspects of climate risk such as policy risk (companies not fulfilling their climate targets) and physical and transition risks associated with climate change.”
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