Articles - Reporting on climate a challenge but an opportunity

 By David Fairs, Executive Director of Regulatory Policy, Analysis and Advice

 We also understand some trustees, possibly influenced by experience with chair’s statement disclosures, have concerns about how the published reports will be used and reviewed.

 Trustees need to address systemic risks
 Climate change has the potential to cause material financial consequences to savers’ retirement outcomes. It’s also a risk which has not been adequately recognised by all investors, where the impacts are rapidly crystallising and where the time to mitigate the most negative impacts is limited. As the Intergovernmental Panel on Climate Change’s working group stated in February:

 “The scientific evidence is unequivocal: climate change is a threat to human wellbeing and the health of the planet. Any further delay in concerted global action will miss a brief and rapidly closing window to ensure a liveable future.”

 A climate transition forecasting consortium commissioned by Principles for Responsible Investment in 2018 called The Inevitable Policy Response, forecasts a continued acceleration in climate policy to 2025 with the potential for increasingly forceful, abrupt and disorderly impacts. Economic and financial systems will change, which in turn will create material risks and opportunities for investors. While the pace, extent and timing of any change remains uncertain, it is inevitable as we adapt to some form of new ‘normal’. This means waiting for perfect data, built from the bottom up of the (global) investment chain is not appropriate. The time for action is now.

 We appreciate there may be some current practical challenges in drafting the disclosures, however, trustees should seek to demonstrate that they have acted to fully understand the range of climate-related risks and opportunities their scheme is exposed to and have taken action to address those – where proportionate to their scheme’s arrangements and other risk exposures – explaining the outputs of their analysis and the outcomes of their actions.

 What TPR will do with the disclosures
 Over the coming months, we will review Taskforce on Climate-related Financial Disclosures (TCFD) reports published by schemes in scope of the regulations. We will be mindful of the challenges and concerns trustees have. We know for many trustees, climate is a substantial body of work, with a steep learning curve in terms in of knowledge, regulatory requirements and emerging and evolving market practices. The outcome of our review of the published reports will also be used to provide high-level observations and feedback to in-scope schemes where we have an existing supervisory relationship.

 The review will also inform trustees and advisers of smaller schemes not in scope but who wish to improve their management of the climate-related risks and opportunities.

 It will also inform the DWP’s review of the regulations in late 2023, which will include a review of the effectiveness of the regulations and the range of schemes to which they should apply and meet two commitments in our climate change strategy where we undertook to review TCFD reports and share best practice examples (with the DWP) and carry out a thematic review of scheme resilience to climate-related scenarios.

 Costs should be considered in context
 We appreciate the cost and resource concerns some trustees have, however these should be seen in context.

 While the first-year costs may be high, these costs will reduce as data, analysis and knowledge improves and in future, resource requirements should also reduce.

 Significant elements of the disclosures made around the core TCFD pillars, in particular, the governance and risk management pillars, are more likely to evolve over time rather than significantly change from year to year – if they have been set up correctly at outset. Similarly, we expect other elements of the core TCFD disclosures to overlap to an extent from year to year. This will minimise the cost burden on schemes when measured on a rolling basis over a period of years.

 And the risks and costs associated with climate change have not been sufficiently recognised and accounted for historically by industry and by society more generally. All investors and all of society will pay catch-up costs as we address the risks and opportunities presented by climate change.

 Ultimately, we believe the disclosure requirements should be seen not only as an exercise in compliance but as an exercise in risk (and opportunity) management, which should lead to improved outcomes for scheme members.

 Also, for some schemes, where limited work on climate-related issues has been carried out previously, the work sitting behind and supporting the disclosures should also offer an opportunity for significant value to be added by enabling trustees to make better informed decisions in relation to climate risks and opportunities.

 Looking to the future
 We anticipate we will take a collaborative approach to the second wave of TCFD reporting, when the net relevant assets threshold for non-authorised schemes reduces to £1 billion on 1 October. However, we will refine our approach and expectations of trustees based on our experience of our review of the first wave of TCFD reports and in line with market and regulatory developments.

 Climate change is one of the defining issues of our generation. As industry knowledge, data and analysis techniques develop and global policy responses evolve, best practices will emerge, and regulations will evolve.

 However, climate and sustainability are intricately interlinked. Long-term success in climate adaption and in building climate resilience requires sustainability to be accounted for. In the Greening Finance Roadmap [PDF], published last October, the government set out plans for Sustainability Disclosure Requirements (SDR) to be imposed on certain occupational pension schemes and asset managers. Details of the proposals have yet to emerge, but industry expectations are they will:

 set similar expectation on schemes as TCFD reporting in relation to governance, strategy, risk management and the use of metrics and targets
 integrate SDR requirements with existing TCFD requirements

 While this has the potential to add further requirements on schemes in the short term, the data challenges should be reduced by the UK’s adoption of International Sustainability Standards Board standards. These standards will form a core component of the SDR reporting framework and will improve data coverage and help schemes obtain high quality, transparent, reliable and comparable reporting by companies and asset managers on climate and other sustainability matters.

 However, ultimately the intention of all these requirements is to ensure risks and opportunities are better managed and improve member outcomes.