On 27th January 2021, the Government responded to the August 2020 consultation on climate risk governance and published for consultation draft governance legislation, other draft legislation and draft statutory guidance to enact its policy proposals. The policy dovetails with the Government’s Green Finance Strategy.
Legislation and guidance are expected to come into effect in October 2021. As it stands, this will require trustees of the largest occupational pension schemes (and all authorised master trust schemes) to address climate change risks and opportunities through governance and risk management measures.
The measures must be in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The idea is that these schemes will set a benchmark of good practice and that their market power will drive improvements in the flow of data necessary for high-quality climate risk governance.
Policy
From 1st October 2021, trustees of schemes with £5bn or more in assets (along with authorised master trusts and any new collective money purchase schemes) at the first scheme year end on or after 1st March 2020 must meet the new climate governance regime.
Bulk and individual annuity contracts where the insurer’s future payments fully meet the cost of specified benefits are to be disregarded for the purposes of the £5bn asset threshold test (as the trustees irreversibly handed over control of the assets to a regulated insurance company).
The new climate governance regime involves trustees putting in place effective governance, strategy, risk management, and accompanying metrics and targets for the assessment and management of climate risks and opportunities.
Trustees must undertake scenario analysis in the first year and every three years thereafter. In other years, they must review whether they should refresh their analysis or explain why they’ve decided not to.
This regime will be extended to schemes of £1bn or more in assets from 1st October 2022, with a report within seven months of the end of the scheme year underway on that date.
The Government intends to consult in 2024 before deciding whether to extend the regime to schemes with less than £1bn in assets.
Practicalities
The draft statutory guidance is for trustees subject to the new regime and describes what they need to do and report on. Trustees are required “as far as they are able” to:
Trustees will be required to obtain data from their asset managers and, in turn, from investee firms on emissions and other characteristics. The Regulator recognises that schemes may face difficulties in acquiring full data for their portfolio, at least in the early days.
Disclosure
Trustees will have to report on these matters within seven months of the end of the scheme year already underway on 1st October 2021. As TCFD reports could be quite long and detailed, they would not need to be presented in full in the trustees’ annual report, but only referenced in it as a key disclosure.
The TCFD report will have to be published on a publicly-available website. Members are to be told that this information has been published and where they can find it in their annual benefit statements. For defined benefit schemes, which may only produce such a statement on request, they will have to add a link to the annual funding statement issued to members.
The website address for the TCFD report will also have to be provided to the Regulator using the annual scheme return.
Penalties
A mandatory penalty of at least £2,500 will apply for failure to publish a TCFD report. Other penalties relating to non-compliance are to be left to the Regulator’s judgement, but the maximum penalty will be £5,000 for individuals and £50,000 for all others.
Capita comment
The Government has sensibly moderated some of the proposals by carving out buy-in annuity contracts and allowing for annual rather than quarterly calculations of metrics, with scenario analysis being carried out every three years and intermediate reviews as needed. This is welcome. However, the new regime will be challenging even for well-resourced large schemes.
For many smaller schemes, the fact that these requirements do not apply to them for now may lead trustees to ignore these developments. However, the Government intends further reforms and Statements of Investment Principles must cover financially-material considerations that link to climate risk. We think trustees should take the opportunity now to review their knowledge and understanding of climate risk and investments in general.
Please speak to your usual Capita contact if you would like assistance.