Investment - Articles - Why trustees must step up on ESG and climate reporting

 By Nicola Parish, Executive Director of Frontline Regulation.

 In March, a United Nations climate change report warned we face a rapidly closing window of opportunity to secure a liveable and sustainable future for all.

 It should be no surprise then that TPR is increasing its focus on environmental social governance (ESG).

 We want trustees, and their advisers, to be aware of our expectations now. And we want them to understand why this is so important, so they’ll be motivated to meet those expectations.

 TPR has launched a campaign to make sure trustees are meeting their ESG and climate change reporting duties.

 Financially material ESG factors, including but not limited to climate change, may affect the financial performance of a pension scheme’s investments or a sponsoring employer’s covenant.

 So, if trustees fail to consider these factors, their savers’ pensions may be at risk.

 We want to see trustees demonstrate they are considering these factors and properly protecting their savers’ pensions.

 To do that, we will check trustees of schemes with 100 or more members have published a statement of investment principles (SIP), which details the policies for how a scheme invests, including consideration of financially material ESG factors including, but not limited to, climate change.

 These trustees must also publish an implementation statement (IS) – which shows how the principles in the SIP have been implemented.

 We have requested trustees provide a web address to their SIP and IS, where relevant, via their scheme returns since 2022.

 Of the 220 DC schemes that should have provided web addresses for their SIP and IS through last year’s scheme return, only 180 provided the information as required.

 Of the 40 that did not, in the majority of instances, either the web address for the SIP and IS were missing or the addresses given did not work.

 This is a basic requirement and it’s a vital way of trustees demonstrating they are protecting savers’ retirement outcomes from risks.

 We are monitoring the situation and expect to see compliance improve. We are warning trustees of schemes in scope that enforcement action may be taken against them if they fail to publish their SIPs and/or IS.

 We do this in the hope it will drive compliance and avoid us using our powers, which include a fine of up to £50,000 (where the trustee is a corporate body).

 Climate-related risk
 We also want to continue to improve the quality of trustees’ governance and reporting of climate-related risk and opportunity.

 We want to see trustees of all schemes in scope publish their annual climate change report (the Taskforce for Climate-related Financial Disclosures report) in accordance with the requirements in the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021. And we want them to provide the web address for that report in their scheme return.

 And from October 2022, we expect trustees to have regard to the Department for Work and Pension’s (DWP) guidance, which was updated in June 2022, and report on a new portfolio alignment metric and, where trustees are reporting for the second time, consider scope 3 emissions.

 Where trustees fail to comply with the publication requirement, we have to impose a mandatory penalty. The minimum is £2,500 and the maximum is £50,000 (where the trustee is a corporate body).

 We have published our review of the first reports and early indications show areas of excellence, some of weakness and a few of concern.

 However, most trustees appear to have made a reasonable effort to comply and have adhered to the spirit of the disclosures.

 We expect reporting to evolve and improve as industry gains experience and data and analytical techniques develop.

 We also believe that the review and scrutiny of disclosures by external stakeholders and interested parties will drive change.

 We hope trustees, including those of smaller schemes not currently in scope of climate-reporting regulations, will find our review useful in improving their management of climate-related risk and opportunities.

 Scenario analysis
 In our climate change strategy in April 2021, we indicated we would seek to influence debate around the most effective ways to combat climate change. Climate scenario analysis is one area where we think there is a debate to be had.

 Our review of reports shows a wide variation in the climate scenarios adopted by trustees with most broadly aligned with the three described in the DWP’s statutory guidance when it was issued in June 2021: an orderly transition, a disorderly transition and a “hot house” world.

 In time, we expect the market to evolve and a degree of consensus to emerge but of more concern is the integrity of some scenarios more generally.

 We accept that climate change impacts are difficult to effectively model in practice. We also agree that there is no one “right answer”.

 However, we can encourage trustees and their advisers to think carefully about the narratives they apply to the scenarios they chose and the outcomes those scenarios produce.

 More focus on outcomes is crucial. Early indications are some reports are light on actions. There are some who appear to regard these reports as merely a tick-box exercise. Reports lacking clarity over actions that have been taken or are being considered will only reinforce that view.

 Action plan
 Reporting is not an end in itself. Therefore, to help focus attention and better inform members, trustees might consider developing a climate action plan setting out what actions (if any) they expect to take and when. Guidance available from the Transition Plan Taskforce may assist trustees to develop such plans.

 The regulations require that trustees set at least one scheme-specific target, which is not legally binding. Some targets in the reports we have seen lacked ambition. That needs to change.

 And we want to see trustees and their advisers continue to take part in the developing debate around not only climate scenario and climate stress analysis, but also nature and wider sustainability reporting.

 We will continue to support trustees in meeting our expectations, including producing updated covenant guidance relating to DB schemes this year, which will include information on assessing climate impact on employer covenant.