By Colin Mayger, FIA, Partner and Richard Davies, Associate and Senior Consulting Actuary at Barnett Waddingham
Solid foundations
The foundation of climate risk management is good governance. It is the first element of the TCFD framework and forms a basis for all subsequent actions and decision-making.
It is crucial to address governance as a primary step to:
help establish clearly defined objectives;
ensure that all relevant stakeholders are involved and engaged from the outset;
avoid unnecessary work and ensure tasks and responsibilities are allocated to the appropriate people; and
establish appropriate processes and resources to meet the objectives.
In short, establishing a clear governance framework sets any project up for success. It ensures that all the detail is being attended to while allowing trustees and sponsors to keep focussed on the big picture.
Ahead of TPR’s General Code - which once released will support trustees to establish an Effective System of Governance (ESoG) – you may already be reviewing your governance policies and processes. While the General Code may not have a huge focus on climate risk, it presents an ideal opportunity to embed climate risk governance within the ESG framework, ensuring that it becomes an integral part of the overall governance structure, enhancing its effectiveness and long-term sustainability.
Looking back
Even for schemes that have already made progress in addressing climate risk, taking a step back and assessing the governance in place is advised. Climate risk governance should periodically be reviewed to keep pace with emerging challenges and regulatory expectations.
While some trustee boards might take the view to wait for the final General Code publication before developing and implementing new policies, it's important not to delay another critical aspect of governance - Trustee Knowledge and Understanding (TKU).
Trustees are not expected to become climate science experts, but they should strive to acquire a certain level of knowledge on general climate science concepts and terminology. This knowledge will equip trustees to understand the advice they receive, actively participate in discussions, and make informed decisions.
That training should ultimately carry across and support trustees in a pension scheme context. This is where we can support. Discussions on climate risk can become dominated by capital allocation considerations (i.e. investments). This is no doubt important, but it is vital to acknowledge its impact on all aspects of Integrated Risk Management (IRM). Trustees should seek pensions-focused training that explores the broader implications of climate risk on a DB pension scheme, say, including potential impact on sponsor covenant and future funding strategies.
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