The Pensions Regulator has launched an eight-week consultation on its draft guidance about climate risk governance and reporting.* Governance failures will be treated as more serious than reporting failures, the regulator has said - though there will be mandatory fines of £2,500 to £5,000 where trustees do not publish a report in time. 

 

The government is rolling out mandatory climate risk reporting, in line with the Task Force on Climate-related Financial Disclosures framework, across the economy until 2025, starting with asset owners. 

 

From October this year, authorised schemes such as defined contribution master trusts and those with more than £5bn in assets will have to demonstrate they assess and manage climate risks and opportunities and report on their work on a publicly available website. Pension funds with assets of £1bn or more will have to do so a year later, vastly expanding the number of schemes in scope. 

 

The government published its final TCFD regulations and statutory guidance last month, following a consultation in January.  

 

 

On Friday, it published the responses to its consultation, by organisations from the Association of British Insurers to the Zurich UK pension scheme. 

 

 

The Pensions Regulator is now consulting on its own guidance, setting out its planned approach to regulating the area. The consultation will likely be welcomed by industry, as the “as far as they are able” wording in the government’s regulations, designed to provide flexibility to trustees, leaves room for interpretation and subjectivity. 

 

“We are being given the power to issue penalties for poor quality reports. This begs the question, what does poor look like?” said David Fairs, executive director of regulatory policy, analysis and advice at TPR, speaking at the Pensions and Lifetime Savings Association’s ESG conference on Friday. 

 

The guidance being published on Monday will provide “more clarity of what’s expected”, he said, including the steps trustees should take and what they should report on. “It's worth noting we’re proposing to treat failures of governance activities as more serious than failures in reporting. We want to see more than box ticking; we want to see a positive change in behaviours,” he added. 

 

Under the new rules, TPR must issue mandatory fines of £2,500 for non-compliance and £5,000 for repeat offenders, but these apply only where trustees have failed entirely to publish a report online in the required timeframe, Fairs said – the fines do not relate to the contents of the report, though TPR can issue a discretionary penalty for that. 

 

“The mandatory fine is if you don’t do anything at all, that’s a pretty black and white thing. Then there is a discretionary fine we can levy on the quality of the attempt to comply with the regulations,” he explained, after the PLSA’s policy director Nigel Peaple mentioned “unhappy memories from the DC chair’s statements” with regard to mandatory fines. 

 

 

The new requirements could be a steep learning curve for many trustees. Fairs said TPR conducted a survey of 250 schemes last October, which showed that about half of all schemes had dedicated some time and resources to climate risk. Only a fifth had added it to the risk register, and less than a fifth monitored and reviewed targets. 

 

Specifically in relation to the TCFD, a large proportion (71%) were unaware of the framework, and less than one in 10 had already made the recommended disclosures at that point. This is despite schemes having had to consider climate since 2019, when rules were brought in to include their approach to environmental, social and governance factors and stewardship in the statement of investment principles. 

 

 

 

“Disappointingly, most schemes have devoted little or no thought to some of these issues,” said Fairs, although he speculated that the figures might have changed if the survey was repeated today. 

 

However, “it does illustrate trustees have a lot to do, they do need to step up, particularly larger schemes and master trusts, where the regulations are coming in force in October,” he said, finding that the understanding of climate-related issues is very varied across schemes. 

 

While the rules will not apply to all schemes, Fairs expects an improvement in reporting on climate change across the board. As larger schemes start having to tackle the issue and improve how they do this, best practice will emerge and this will “cascade to smaller schemes”, he argued. 

 

Fairs predicted that the information from service providers to pension funds will begin to improve. Although he had been concerned that support industries around trustees might not yet have the capability and capacity to provide what trustees need, he said “in time this should be available”. 

 

 

As regulations come into force for asset owners, the Financial Conduct Authority is starting to roll the TCFD rules out among its regulated entities, having last month issued two consultations on TCFD alignment among asset managers, pension providers and listed companies. The FCA is hoping to set final rules in early 2022 to come into force from 2023 for schemes with £5bn or more and from 2024 for smaller ones. 

 

 

Nike Trost, the FCA’s head of asset management and pensions policy, said government bodies and regulators “have worked really closely together to make sure those things link and have similar thresholds”. She argued that this should encourage funds to have the right quantitative information and scenario analysis. 

 

“Quantitative disclosure is a step change for trustees and industry,” she noted, and said that “we understand there are differences in what people can achieve, that’s built into the regime with the ‘as far as possible’ wording”. 

 

She said there was consistency in the approach to metrics and calculations, noting that “a lot of that refers to global practice... We've been keen to ensure that this allows for information flow across all your assets regardless of where you’re invested”, but the FCA is exploring whether ESG ratings providers should come into scope for regulations or best practice recommendations and has asked for views on the matter. 

 

However, Trost warned the industry not to lose sight of the wood for the trees, saying that while it is easy to get lost in granular issues, trustees should not forget why they matter and what climate change means for their asset base. 

 

ESG scores and data “are really important for trustees to make disclosures, but more importantly to make investment decisions. It’s not reporting for reporting’s sake,” she emphasised. 

 

*this article has been updated to reflect the fact that the consultation has now been published