What UK pensions investors have learned from climate reporting

Trustees confront a range of challenges as they get to grips with new climate-risk disclosure rules 


Members of the UK’s largest pension schemes won’t have to wait much longer to learn how their pensions are impacting the environment.

The Task Force on Climate-Related Financial Disclosures (TCFD) reporting framework came into effect in October, starting the countdown for a host of workplace pension schemes to publish their reports. The first batch is poised to be released in the next few months. 

The new rules apply to schemes with more than £5bn of assets under management, as well as master trusts of all sizes. Schemes with more than £1bn of assets under management will have to start complying with the rules from October 2022.

While the regulation is already live for those larger schemes and master trusts, they have seven months from the end of their scheme year to produce their report. For instance, if a scheme’s year ended in December, it will have until July to publish. Most schemes either run from January to December or April to March, says Stuart O’Brien, a partner at Sackers.

The report is not something you can pull together in a week, so engaging early and starting to gradually ease your way into compliance at an early stage really does help

However, it’s not just the actual TCFD report that schemes must worry about. They also have several governance-related activities that need to be completed before the end of their scheme year. That means the new rules have had varying impacts, depending on when that date has landed.

“If you were a December year-end, you had a lot to do in a short space of time and although schemes were trying to do a lot of preparatory work, there will be things that weren’t quite done before the scheme year ended,” says O’Brien. 

Those tasks include carrying out climate scenario analysis, formalising governance policies, and identifying three climate-related metrics and how they will be measured. The first two of those are set criteria: the total emissions of a scheme’s asset portfolio and its carbon footprint. Schemes then have the freedom to choose a third metric that isn’t emissions related.

Engaging with asset managers

Since the new rules entered force, the Department for Work and Pensions has consulted on including a fourth metric focused on how schemes’ investments are aligned with the Paris Agreement net-zero goals. This is expected to be introduced from October this year.

“The consultation suggested schemes already in scope of the TCFD requirements might choose to voluntarily use that as their third metric for the first year of compliance to effectively give them a dry run at it for next year,” says Simon Borhan, a managing associate in Linklaters’ pension funds group.

One challenge for many schemes is accessing quality data that is consistent and usable. Trustees should engage with their asset managers as soon as possible to ensure the data provided is suitable.

“The report is not something you can pull together in a week, so engaging early and starting to gradually ease your way into compliance at an early stage really does help, rather than suddenly hitting a cliff-edge at the end of the seven months. That might look like a long way away, but don’t underestimate the amount of work that it will take,” says Borhan.

Given that this is the first year of TCFD reporting, some schemes are unsure how candid they need to be when disclosing where they have gaps in their data.

“There is a bit of tentativeness at the moment, not because they want to hold anything back but there is a sense that if they are really open and honest while others are not, it could make it look they haven’t got a good handle on this,” says Helen Prior, a client director at Cardano.

While schemes might be reluctant to signpost any shortcomings, it will be more damaging in the long run if they misrepresent how far ahead they are, says Prior.

“Everyone is in the same boat and actually if you are open and honest about what you’re still grappling with, you can frame it as you are on a journey and that you expect the quality of reporting will improve as better data and best practice emerges,” she says.

Managing climate-related risks

Some trustees might also struggle with how to present the report, given that it has multiple potential readers, including regulators, scheme members and activist groups. That means the first reports are likely to be quite hefty.

“There will be a tendency to just make sure that everything is covered and produce a very long report,” says O’Brien. “How much value that will be to pension scheme members is another matter. These will be dense documents, full of jargon about scenario analysis that won’t be very readable.”

To counter this, O’Brien suggests schemes should produce the main report for the regulator and then create a more compact, intelligible version for scheme members that directs them to the main report if they are interested.

Some trustees face another challenge: what happens when the data shows that certain parts of their asset portfolio have high carbon exposures? Jennifer O’Neill, a responsible investment consultant at Aon, calls this the divestment dilemma. Do schemes exit funds that are carbon intensive or do they engage with those investment managers to try to mitigate the risks?

“Engagement is key,” she says. “While you need to reserve the right to be able to exit if that engagement isn’t fruitful, engaging first rather than making a snap decision that’s predicated on one data point without understanding the full context is very important.” 

Trustees should also be careful not to treat TCFD as a mere box-ticking exercise and remember that climate change could have an adverse impact on the size of their members’ pensions.

“It’s important not to lose sight of the wood for the trees,” says O’Brien. “The regs are quite prescriptive in terms of the things you have to do, but the whole point of this is that trustees should be managing climate risk as it presents financial risk to their investment portfolios. It’s quite easy to lose sight of that and start measuring things just for the sake of measuring things.”