The DWP has, in a consultation response and new consultation on climate risk, rejected various requests for exemptions from new regulations but expanded the use of “as far as they are able” to give funds some leeway. It has also changed the required metrics calculation from quarterly to annually, and will now not consult on 'implied temperature rise’ - but has added trustee knowledge and understanding requirements. 

 

The Department for Work and Pensions has on Wednesday published a consultation on climate risk regulations and guidance as well as non-statutory guidance on how to apply the Task Force on Climate-related Financial Disclosures, following on from its August consultation. The new consultation closes on 8 March, suggesting that climate change is a risk that will not wait for a sluggish industry to adapt. 

Pensions minister Guy Opperman implied that he did not want the Pensions Regulator to tolerate box-ticking.

"Whilst there is widespread support for the government’s proposals in the policy consultation, pension schemes must not just comply with regulations in a box-ticking fashion. They must also show leadership and embrace the change that is occurring," he said.

 

"Failing to ensure climate risk, the most systemic risk facing financial services, is properly considered is – in my view – a failure in trustees’ duty to protect members," Opperman added.

Addressing trustees that are sceptical of the government's direction or pace of change, he said: "To these trustees I say that the world is changing, the challenges are changing. You need to change."

 

Various pension schemes and industry participants had pleaded for an exemption from the climate regulations on the grounds that they are closed or invested primarily in gilts or hedging instruments, or asked for the size threshold to be increased to £10bn.

 

But the DWP does not mince its words in the response, saying while it notes the view “that an asset-based threshold is a relatively broad-brush approach to defining the scope of our proposals”, it believes that “the alternative approaches floated by respondents would likely be as blunt or blunter whilst typically more complex to apply”. 

 

It questions the logic of assuming that government bonds and hedging instruments are not exposed to climate risk and notes that models are emerging to take account of this. 

 

"It is right that large schemes which provide for the retirement of many thousands of savers should be subject to our requirements, irrespective of whether they are open, closed, fully or under-funded and regardless of how they are invested,” the DWP concludes. 

 

 

The department has given way on a few other points. Among others, trustees will have to select at least two emissions-based metrics, one of which must be an absolute measure of emissions and one which must be an intensity-based measure of emissions, as well as one additional climate-related metric. 

 

However, “trustees will be required, as far as they are able, to obtain the data required to calculate their chosen metrics on an annual basis – rather than quarterly”, the DWP says.  

 

The change was made because many respondents to the previous consultation had pointed out that underlying companies only report their greenhouse gas emissions annually, and so quarterly reports by investors would add little value. Similarly, trustees will now only need to measure performance targets once a year. 

 

The DWP has also extended its “as far as they are able” provision to the calculation and use of the trustees’ chosen metric, rather than just the collection of data. 

 

Scenario analysis is, compared with the August proposals, now slightly less onerous as well. Trustees will now only need to conduct scenario analysis of at least two scenarios in the first year and then every three years thereafter, instead of annually.  

 

They will in the intervening years have to do an annual review of their scenario analysis and “carry out fresh analysis where they consider it appropriate to do so”, which the DWP says is likely to be the case if there is: 

 

Trustees should also prepare for training on climate risk. The DWP has added to the proposals on governance and will require trustees to have “an appropriate degree of knowledge and understanding of the principles relating to identification, assessment and management of climate change risks and opportunities to properly exercise their functions”. 

 

Elsewhere, the government is now no longer considering consulting on Paris alignment and ‘implied temperature rise’ at this point, the consultation notes, acknowledging that there are methodological challenges in doing so. 

 

“As there is still uncertainty and inconsistency between the methodologies used to measure ITR, it is our view that now is not the time to consult on making it mandatory for trustees to measure and report their ITR... However, we still recognise the potential benefits of trustees working out the ITR of their portfolios. We have therefore included the option of a portfolio alignment metric within the draft statutory guidance accompanying our proposals on metrics and targets,” it says. 

 

 

Sackers partner Stuart O’Brien, who chaired the PCRIG which produced the non-statutory guidance, said the draft regulations and accompanying statutory guidance largely follow the DWP’s proposals.

  

“There is a very short consultation period running only to 8 March, which suggests that the DWP has set its course on what is proposed and schemes should not expect significant changes. They have also brought forward the planned review for schemes not yet in scope,” he said. “The DWP will now revisit whether climate governance and reporting obligations should be introduced for those schemes in the second half of 2023.” 

  

He said there were also some helpful adjustments based on consultation feedback, such as the decision to take buy-ins out of scope for the £5bn and £1bn thresholds of schemes in scope.  

 

“This will be helpful for very mature de-risked schemes. Also welcome is the decision to require that trustees conduct scenario analysis once every three years rather than annually, although schemes must still do their first scenario analysis in the first year that the regulations apply to them,” he added. 

 

“Much is made in the regulations and guidance of trustees carrying these activities 'as far as they are able'. Inevitably there are going to be tensions with data availability here, so it is helpful that the regulations acknowledge that trustees may need to take a proportionate approach, although I predict much debate around what may or may not be required in practice,” he said. 

 

One of the more difficult aspects of the new rules will be the performance targets, he warned, even if these must now ‘only’ be reported annually. “In my view, this is going to be one of the harder aspects of the regulations for trustees to get to grips with. Trustees will need to think hard about how the targets they set align with their fiduciary duties and what is in the best financial interest of their scheme members.” 

 

Others have called the regulations a ‘step change’. Gareth Mee, UK insurance sustainable finance leader, said the DWP’s guidance marks “a huge step forward”. 

 

“It is a step change for the pensions industry and reflects the increased policy appetite around climate change and net zero. Implementing the guidance is not trivial though and schemes and trustees need to begin now if they are to hit regulatory deadlines and avoid censure,” he warned, echoing concerns around the implementation deadline expressed by some consultation respondents. 

 

The new regulations also require trustees to assess how the covenant is affected by climate risk. Although some respondents worried about having to publicise sensitive information, the DWP argues that “there was also strong support for the covenant to be assessed in relation to climate change”. 

 

It notes that because of the government’s Roadmap towards mandatory climate-related disclosures, “many large companies will, subject to consultation, be required to publish their own TCFD reports. This will make a significant amount of information about sponsoring employers publicly available.” 

 

Stuart OBrien

Mike Clark

Nick Spencer

Paul Appleby

Mark Tennant