Climate change governance guidance
Background
Issued: June 2021
Last updated: September 2022
Summary
You must meet the requirements of the climate regulations, and you must have regard to the DWP’s statutory guidance in doing so.
To help us decide whether you have done this, we will be looking for clear evidence that you, as trustees:
- are taking proper account of climate change when you are making decisions about your scheme, and that those advising you are helping you to do this
- have carried out your analysis in a way that is consistent with the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations so that savers and others can be confident in it
- have seriously considered the risks and opportunities that climate change will bring to your scheme, in its particular circumstances
- have decided what to do as a result of this analysis and have set a target to help you achieve that goal
We acknowledge that the requirements of the climate change regulations are new and may appear daunting for trustees. However, the requirements are formed around the TCFD framework, and trustees might benefit from working through the governance and reporting requirements in a structured way.
Who this guidance is for
This guidance is aimed at trustees who are required to comply with the duties[1] on governance and reporting of climate-related risks and opportunities.
In paragraphs 9 to 17 of part 1 of the DWP’s statutory guidance, the Audience section describes who is subject to those requirements.
Trustees who are not subject to the requirements, and decision-makers at local government pension schemes, might wish to follow this guidance to improve the governance and resilience of their schemes in relation to climate change. Trustees of schemes that are not currently in scope could consider applying those aspects of the guidance they feel are likely to have the most impact on their scheme in the first instance.
Introduction
The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (as amended) and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 contain new requirements for certain trustees.
Trustees subject to these requirements must take steps to identify, assess and manage climate-related risks and opportunities in a proportionate way and report on what they have done. These reporting requirements align with the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD).
How to use the different sets of guidance
You must have regard to the DWP’s statutory guidance[2] ’Governance and reporting of climate change risk: guidance for trustees of occupational schemes’ when complying with the Regulations.
TPR’s guidance describes what you need to do and report on in your annual climate change (or TCFD) report to comply with the new legislation. It does not impose any additional requirements on trustees but does provide examples of how to apply the regulations and the DWP statutory guidance. This will help to inform trustees of the types of approaches we consider to be appropriate.
Within each section, we detail:
Example steps to take
The kinds of steps we expect you to take and report on. They are not exhaustive. However, by completing steps like these, you should be able to demonstrate good governance of climate-related risks and opportunities.
What to report
In your TCFD or climate change report, you must disclose the actions you take to help you understand and address your scheme’s climate-related risks and opportunities. They are described in more detail in part 3 of the DWP’s guidance.
You may also include additional information in your report that you consider may be helpful to disclose.
Regulatory approach
Our approach to monetary penalties is set out in our monetary penalties policy and in the appendix on breaches of the climate change governance and reporting regulations.
A mandatory penalty applies in cases where the report is not published. The amount of the mandatory penalty must be at least £2,500. See part 4, paragraphs 6 to 10 of the DWP’s statutory guidance for more information on the requirements around publication of the report.
In all other cases, where we believe the requirements have not been met, we have a range of enforcement options, including the discretion to issue a penalty notice. In considering whether to impose a penalty and the amount of any such penalty, which may be up to £5,000 for an individual and £50,000 in any other case, we will follow the approach set out in the appendix to our monetary penalties policy referred to above.
The appendix also gives examples of how we propose to approach penalties for breaches of the regulations. For example, a failure to disclose scheme resilience in different temperature scenarios would make it more difficult for scheme members to see the implications of different temperatures for their pension savings. We may treat this more seriously than a failure to explain a decision not to undertake new scenario analysis, where the report otherwise gives a good explanation to members, and there are no underlying breaches. We are likely to have greater concerns about a failure to carry out the underlying governance activities than a failure to make disclosures. In each instance, we would consider the facts of the case and the impact of the failure.
We also have powers to issue:
- a compliance notice to direct a trustee to take, or refrain from taking, specific steps to ensure that non-compliance with the regulations is remedied
- a third-party notice to direct a third party (who is not a trustee) to take, or refrain from taking, such specific steps if, in our view, the non-compliance is or was, wholly or partly, a result of an omission by that third party
In the event of non-compliance with compliance notices and/or third-party notices, we also have the power to issue discretionary fines.
We may also engage other powers, such as our ability to provide information, education and assistance, where they apply, and we consider it appropriate to do so.
‘Building on existing duties’
Trustee fiduciary duties
You will already be managing financial risks to your scheme as part of your fiduciary duties. This should include consideration of any financially material risks and opportunities, including those arising from environmental, social and governance (ESG) considerations which include, but are not limited to, considerations relating to climate change.
Climate-related risks should be managed alongside the other risks which you consider when exercising your fiduciary duties.
Statement of Investment Principles and implementation statement requirements
Under existing regulations, if you are required to prepare a Statement of Investment Principles (SIP), it must include:
- a policy on environmental considerations (including climate change) which you consider to be financially material
- the extent (if at all) to which you have taken into account non-financial matters
- your voting and stewardship policy
You must describe in your implementation statement how you’ve put your voting and stewardship policy into practice. If you are a trustee of a scheme that provides money purchase benefits, you must also describe in your implementation statement how you’ve put the other policies in your SIP into practice.
TPR’s code of practice
Our proposed new code of practice will include a module that refers to climate change. This will include the requirement that governing bodies of affected schemes should assess climate-related risks and opportunities as part of their effective systems of governance, including internal controls.
Other guidance you may find useful
- Detailed and practical advice on governance and TCFD disclosures on the Pensions Climate Risk Industry Group (PCRIG) guidance on climate change.
- More on the TCFD, including a Knowledge Hub.
Our updated covenant guidance, which we expect to publish in late 2022, will include a section on how you and your advisers could consider climate-related risks and opportunities as part of your assessment of covenant.
We encourage you to monitor developments relating to TCFD. However, the specific requirements of trustees are those detailed in the regulations named in the introduction to this guidance.
‘As far as you are able’
The DWP’s guidance states you must carry out the following activities ‘as far as you are able’.
- Undertake scenario analysis.
- Obtain Scope 1, 2 and 33 greenhouse gas emissions and other data relevant to your metrics.
- Use that data to calculate your metrics.
- Use these metrics to identify and assess climate-related risks and opportunities.
- Measure the performance of your scheme against the target you set.
The primary purpose of the requirements to carry out certain activities ‘as far as you are able’, is to recognise that all the information you need to carry out these activities may not be available immediately. More information should become available as the investment industry adapts to the new data capture and reporting requirements.
You will need to document the steps you have taken to ensure, or seek to ensure, compliance with your legal obligations, the obstacles you have encountered, and the impact those obstacles have had.
Read paragraphs 1 to 14 of part 2 of the DWP’s statutory guidance for what to do when you are not able to obtain data for all your investments. This includes instances where obtaining some data would require a disproportionate amount of resource.
Ongoing and discrete requirements
The requirements on governance, strategy (excluding scenario analysis) and risk management are ongoing. The activities relating to scenario analysis, metrics and targets must be carried out at specific intervals.
Read paragraphs 15 to 18 of part 2 of the DWP’s statutory guidance for more details.
Level of the assessment
The level of the assessment you must carry out around each of the four core elements for disclosure (governance, strategy, risk management and metrics and targets) depends on the type and nature of your scheme.
Read paragraphs 19 to 25 of part 2 of the DWP’s statutory guidance for more details.
Trustee knowledge and understanding (TKU)
Information on climate-related risks and opportunities is evolving quickly. Make sure your knowledge and understanding of the identification, assessment and management of the risks and opportunities relating to climate change are up to date. This will help you develop your governance of climate-related risks and opportunities as well as enable you to understand any external advice or information.
We expect the actions you take to comply with the legislation and the information that you report to demonstrate that you know and understand the risks and opportunities to your scheme from climate change.
Read paragraphs 33 to 41 of part 2 of the DWP’s statutory guidance for more details. Please note that, unlike other parts of the DWP’s statutory guidance, trustees can choose not to regard this part of the guidance.
Footnotes
- [1] As set out in the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (as amended) and the Occupational Pension Schemes (Climate Change and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 (the 'Climate Change Regulations').
- [2] The DWP statutory guidance does not extend to the guidance on trustee knowledge and understanding at part 2 paras 33 to 41 (see Part 1 para 5 of that guidance).
- [3] Trustees are not required to obtain Scope 3 greenhouse gas emissions in the first scheme year in which they are subject to the requirements.
Governance
Issued: June 2021
Last updated: September 2022
Example steps to take
Taking the following actions may help you meet your obligations on governance.
Include climate-related risks and opportunities in your decision-making
Add climate-related risks and opportunities to the remit and terms of reference of one or more appropriate subcommittees (for example, the investment and governance subcommittees if you have them). The remit may include oversight of those advising on or involved in scheme governance.
Document the structure for making climate-related decisions in your scheme, showing the roles and responsibilities of all relevant parties and how information flows between them. This might include the role of those undertaking or advising on governance activities, such as executive officers, in-house teams or external advisers, and how such roles are overseen. It may also be helpful to set out how this work is integrated into your monitoring framework and meeting cycle. This exercise should make it easier to complete the governance section of your climate change report.
Example: establishing oversight
The trustees of the AB pension scheme receive occasional training and updates on climate-related risks and opportunities. They want to establish a more robust governance process for this work.
They use their annual strategy day to consider climate-related risks and opportunities. The day includes trustee training on developments in climate-related issues relevant to the scheme, an overview of what similar pensions schemes are doing well, and where schemes should improve.
Following the strategy day, the trustees understand why climate change is relevant to their scheme. Based on their discussion that day, the trustees have agreed to delegate oversight of climate issues to the funding and investment subcommittee (FISC). They update their terms of reference to make this explicit and include a requirement for the FISC to report back regularly and to provide support to the board on wider climate-related issues.
To establish a governance structure, the trustees ask the subcommittee to carry out the following tasks over the next six months.
- Review and propose updates to the investment beliefs and Responsible Investment policy to include climate change.
- Improve the knowledge and understanding of the subcommittee with more training on specific subjects. They start with specific climate risks for different asset classes and climate change scenario analysis.
- Carry out an audit of all the relevant parties involved in running the scheme to assess their competency on climate change and identify any skills gaps.
The trustees ask the subcommittee to report back on these tasks in six months and propose the next steps. They add climate change as a standing agenda item at the main trustee board meeting.
The trustees agree that, as their knowledge of their scheme’s exposure to climate-related risks and opportunities develops and is informed by outputs from their TCFD related activities, they will review:
- their governance structures and processes
- the extent to which time and resources are allocated to climate-related issues
Review your providers' and advisers' level of expertise
Review whether your relevant service providers and advisers have the skills and resources to address climate-related risks and opportunities and provide appropriate levels of data and advice for your scheme.
Be prepared to question and challenge service providers and advisers if the information provided is unsatisfactory.
Where specific skills are limited, you may consider re-tendering mandates with climate-related criteria or appointing specialists. Set climate-related objectives and integrate them into your performance monitoring.
You might find it helpful to use the Investment Consultants Sustainability Working Group’s guide that sets out the following five themes against which trustees should expect their investment consultants to demonstrate their competency at identifying and dealing with climate-related risks and opportunities.
- Firm-wide climate expertise and commitment.
- Individual consultant climate expertise.
- Tools and software to support climate-related risk assessment and monitoring.
- Thought leadership and policy advocacy.
- Assessment of and engagement with investment managers.
A similar proportionate framework could be adopted for other advisers.
Example: the climate competency of service providers and advisers
The CD pension scheme appointed their investment adviser four years ago. At that time, climate-related issues were not an important feature of the tender process. The trustees want to ensure that their investment adviser can adequately assess and include climate-related risks and opportunities in their advice. They ask the investment adviser to describe:
- their firm’s ability to identify and manage climate-related risks and opportunities, and how this is expected to develop in the future
- how they include climate issues in the advice they give to their clients
- how much emphasis is placed on climate-related risks and opportunities in their investment research and monitoring functions
- the climate-related training they provide to their staff
The trustees also ask their investment adviser to provide examples of:
- times they have identified climate-related risks and opportunities for schemes and included this in their advice to schemes
- what actions trustees have taken to manage climate-related risks following this advice
- how they monitor climate-related risks and opportunities on an ongoing basis
In addition, they ask their investment adviser to demonstrate how they meet the climate competency expectations set out under the Investment Consultants Sustainability Working Group template. They ask them to do so in relation to climate-related risks and opportunities relevant to the matters on which they are advising or assisting.
The trustees want to document the requirement to provide advice and assistance in relation to climate-related risks and opportunities. Therefore, following the review, they adjust:
- their investment adviser’s service agreement
- their investment adviser’s objectives against which they monitor their performance
In setting their investment adviser’s objectives, they make allowance for the current limited availability of data and the expected development of analytical techniques. They agree to re-consider the objectives annually, taking market developments into account.
The trustees then conduct a similar exercise with their scheme actuary and covenant adviser in relation to climate change relevant to the matters on which they are advising or assisting.
What to report
When reporting on the steps you have taken, you must describe:
- how you oversee climate-related risks and opportunities
- the role of persons other than trustees who undertake scheme governance in identifying, assessing and managing those risks and opportunities
- the role of persons other than legal advisers who advise or assist you with scheme governance
- the processes you have put in place to make sure that such persons take adequate steps to identify and assess any climate-related risks and opportunities that are relevant to their work
You should also concisely describe:
- how the board and relevant subcommittees are kept informed about climate-related risks and opportunities
- how they assess and manage those risks and opportunities
- how often those discussions take place
- if you questioned and, where appropriate, challenged information provided to you by others undertaking, or advising and assisting with, climate-related governance
- the kind of information you received from those people about their consideration of climate-related risks and opportunities for your scheme, and how often you received it
- your reasons for spending the amount of the time and resources that you did on the governance of climate-related risks and opportunities
- the training opportunities provided for relevant employees who are involved in, advise or assist with scheme governance about climate-related risks and opportunities. If you identify skills gaps, you may also describe whether you encouraged external advisers to provide training opportunities
Strategy and scenario analysis
Issued: June 2021
Last updated: September 2022
Example steps to take
Taking the following actions may help you meet strategy and scenario analysis obligations. You only have to conduct scenario analysis, as far as you are able.
Identify suitable time periods
Review and decide appropriate short, medium and long-term time periods for your scheme. Consider the type of benefits payable, membership profile and the time over which member payments will be made.
Commit to a regular review of the time periods, for example, following any material change in the scheme membership, or as part of any SIP review.
Example: different time periods for schemes with different characteristics
These are provided purely as an example. Trustees should choose appropriate time periods that work for their scheme, having taken advice on their scheme features and the likely future development of the scheme’s funding and investment arrangements.
| Time period | A: Closed mature DB scheme (yrs) | B: Open immature DB scheme (yrs) | C: Expanding DC master trust, with decumulation option (yrs) |
|---|---|---|---|
| Short term | 3 | 5 | 5 |
| Medium term | 7 | 10 | 10 |
| Long term | 12 | 25 | 30 |
Scheme (A): This is a mature DB scheme, which is closed to new members and to future benefit accrual.
The trustees recently reviewed their investment strategy and decided to move their investments so that they are more in line with the types of assets that an insurer would hold, as they intend to buy out their liabilities in the future.
The trustees set their:
- short term as three years, given the intended changes to their current investments
- medium term as seven years, given the expected changes in climate change data quality and climate regulations
- long term as 12 years, in line with the duration of the scheme’s liabilities
Scheme (B): This is an immature DB scheme, which is open to new members. The trustees decide to set their:
- short term as five years, given the expected changes in climate change data quality and climate regulations
- medium term as 10 years, given the importance of significant changes being made by 2030 to limit global warming to 1.5°C above pre-industrial levels
- long-term as 25 years, in line with the duration of the scheme’s liabilities
Scheme (C): This is a DC master trust which is rapidly growing and has a significant level of new contribution inflow. The scheme has recently introduced a decumulation option, meaning that members can be invested with the scheme after they have reached retirement, rather than transferring out or buying an annuity policy. The trustees decide to set their:
- short term as five years, given expected changes in climate change data quality and climate regulations
- medium term as 10 years, given the importance of significant changes being made by 2030 to limit global warming to 1.5°C above pre-industrial levels
- long term as 30 years, in line with a target of net-zero around 2050
The trustees of Schemes (A), (B) and (C) periodically review the short, medium and long-term time periods they selected for their schemes in light of scheme and market developments, including, for example, material developments concerning:
- the maturity profile of the scheme
- climate policy and regulation
- developments in data quality and modelling capabilities
Identify how the scheme is likely to develop
Consider how the scheme may develop over future time periods, how the membership and scheme profile might evolve, and how the investment strategy and its implementation might change.
This could include putting in place processes to review opportunities that arise from the transition to a low-carbon economy.
Integrate climate change into regular scheme activities
Make sure your investment consultant considers climate risks and opportunities in their next review of the investment strategy and its implementation. If you have not previously considered the implications of climate-related risks and opportunities for your scheme, you might decide to bring the next investment strategy review forward.
Add a climate-related risks and opportunities section to your investment performance and risk monitoring reports, including an assessment of your current investment strategy.
For DB schemes, make sure your scheme actuary and covenant adviser include consideration of climate-related risks and opportunities in their advice as part of any actuarial valuation, or as part of any ongoing monitoring or advice they provide on scheme funding and covenant. Include such risks and opportunities in your integrated risk management framework.
Speak with the scheme’s employer
For DB schemes, it is important to understand how climate-related risks and opportunities could affect the employer’s covenant. Find out how your scheme’s sponsoring employer assesses climate-related risks and opportunities over similar time periods to those you have identified.
Conduct scenario analysis
Assess the resilience of your investment strategy (and for DB schemes, your covenant and funding strategy) against at least two scenarios. Bear in mind that the purposed of scenario analysis is to draw attention to important risks and opportunities and to inform trustees’ decision making, rather than seeking a precise forecast of the future.
You must, as far as you are able, conduct scenario analysis in at least two scenarios.
- One scenario must assume an increase in global average temperatures of between 1.5 and 2°C above pre-industrial levels.
- We suggest that you consider that the other scenario assumes an increase in global average temperatures of well above 2°C above pre-industrial levels (in order to ensure that your analysis captures a scenario with higher physical risks).
Consider the following factors in your assessment.
- The nature of the transition to the temperature, for example, a measured orderly transition or a sudden, disorderly transition.
- The potential effects of the scenarios that might arise in the different time periods you identified for your scheme.
- The potential effect of the scenario on specific asset classes and individual material holdings.
- The potential effect of adjustments to the strategy.
- For DB schemes in particular, the potential impact on:
- different tranches of liabilities or liabilities with different characteristics
- the employer’s covenant: the strength of the employer, the affordability of deficit repair contributions and its ability to underwrite investment and funding risks over different time periods, and as a result
- contingency planning or covenant monitoring requirements
Scenario analysis may be qualitative, quantitative, or both. It might be easier to start with a qualitative approach. You should develop the sophistication of the approach and move towards using quantitative analysis, especially where you believe that climate change could pose significant risks to your scheme.
Developments that might trigger the updating of the scenario analysis.
You might decide to update your scenario analysis after significant changes in the following areas.
- Investment strategy, for example, a higher allocation being made to matching assets following a material deterioration in the employer covenant, which reduces the trustees’ risk appetite.
- The availability of data, for example, increased data availability following the development of their investment managers’ climate-related data reporting capability across asset classes.
- The way the scheme's investments are invested, for example, a switch from a growth or matching structure to a dedicated cashflow-driven investment portfolio.
- Modelling techniques or capabilities, for example, after industry reaches consensus about how some currently challenging asset holdings could be better modelled.
- The scheme’s liability profile (for a DB scheme), for example, after a material proportion of the scheme’s liabilities is secured under a buy-in policy with an insurance company or the carve-out of some of the liabilities following a corporate transaction.
- The scheme’s membership profile (for a DC scheme), for example, after a material growth in new business by a DC master trust.
- The introduction of a decumulation fund (for a DC scheme), for example, after a master trust introduces a decumulation option for members, which enables them to take their benefits in retirement from the trust rather than transferring out.
- Global policies or regulations, for example, the introduction of a carbon tax.
Example: using a qualitative approach in scenario analysis
The trustees of the EF scheme have recently started to consider climate-related risks for their scheme. It is a DB scheme, and the sponsor covenant is currently rated ‘tending to weak’, the scheme is underfunded, and a 12-year recovery plan is in place. The sponsor’s main business operations are heavily carbon dependent, and the sponsor has only recently started to develop plans to reposition the business towards a low carbon economy.
The trustees arrange for their advisers to run a scenario analysis workshop to help them understand the options available and the best approach for their scheme.
Following the workshop, the trustees understand that:
- the nature of the investments held in the scheme means that there is currently limited data availability and options for analysis
- scenarios represent possible futures, not predicted futures
- the scenarios they select should represent the type of future temperature increase and policy pathways they consider most relevant
- the scenarios they use should be clearly differentiated and that they need to understand the limitations and specific assumptions underpinning them
Given the current limitations, the trustees decide to start with qualitative analysis, intending to move to quantitative analysis as they gain more experience. They ask their advisers to illustrate how qualitative scenario analysis might be used to understand how climate-related risks and opportunities might arise, impact investment and funding strategy and be used to inform the trustees’ decisions.
They suggest the illustrative analysis is based around an increase in the price of carbon of 50% in 2025, followed by a further increase of 50% in 2030, and three different transition profiles for the scheme and sponsor.
- A no change transition where the sponsor does not transition and the scheme assets continue to be invested as currently expected.
- A managed transition, where the sponsor’s business and the scheme investments transition to a 30% lower exposure to carbon by 2030.
- An accelerated transition, where they both reduce their carbon exposure by 60% by 2030.
The trustees acknowledge that projecting covenant over longer horizons is challenging for their covenant adviser but believe industry sector views can provide some insight. They ask their covenant adviser and their investment managers for their industry sector views. They then ask their investment, covenant and actuarial advisers to develop a qualitative narrative around each of the transition profiles.
They extend the analysis to include: ’What if the covenant deteriorated to weak or the sponsoring employer became distressed?’ They use the outputs to inform some high-level analysis and support a workshop discussion about the likely impacts on the scheme’s funding and investment arrangements.
The trustees use the insights they gained to help develop a refined range of qualitative scenarios to consider with support from their advisers.
Document the resilience of your scheme
Clearly document your analysis of what the scenarios, and the transitions within them, mean for your scheme. Incorporate your findings into your wider governance of climate-related risks and opportunities, for example, your work on risk management.
What to report
When reporting on the steps you have taken, you must describe:
- the short, medium and long-term time periods you have identified for your scheme
- the climate-related risks and opportunities relevant to the scheme over the short, medium and long term
- the impact of the risks and opportunities on your scheme’s investment strategy (and in the case of a DB scheme, your funding strategy)
- the most recent scenarios you have used in your analysis
- the potential impacts identified in those scenarios on the scheme’s assets and liabilities (and if you have been unable to obtain data to identify potential impacts for all the assets, you must explain why)
- the resilience of your investment strategy (and in the case of a DB scheme, your funding strategy) in these scenarios
- if you decided not to conduct new scenario analysis outside the mandatory cycle, why that is the case
You should also describe:
- the reasons for choosing the scenarios you have used
- the key assumptions for the scenarios you have used and the key limitations of the modelling
- any issues with the data or its analysis which have limited your assessment within the context of ‘as far as they are able’
You may include information in your report on any other aspects of the assessment of your investment strategy (and in the case of a DB scheme, funding strategy) and scenario analysis that you consider would be helpful to disclose.
Risk management
Issued: June 2021
Last updated: September 2022
Read paragraphs 95 to 116 of part 3 of the DWP’s statutory guidance for more on how to include climate-related risks in your risk management processes.
For a further explanation of how climate-related risks and opportunities can affect pension schemes, read paragraphs 26 to 32 of part 2 of the DWP’s statutory guidance.
Example steps to take
Taking the following actions may help you meet your risk management obligations.
Identify the climate-related risks and opportunities and assess their impact
Take advice on the climate-related risks and opportunities that might affect your scheme over different time horizons, covering its investments (and for DB schemes, employer covenant and liabilities). Your existing advisers may be able to offer this service. You may also need to consider input from specialist advisers.
Free online resources such as the Sustainability Accounting Standards Board (SASB) climate risk map can help you form an initial view of the types of risks and opportunities that might be relevant and help guide your discussions with advisers.
Develop a dashboard
Consider developing a climate risk and opportunity dashboard to include in your regular reporting cycle.
If you have a DB scheme funding strategy, include a section in the dashboard on funding and covenant.
Make sure your relevant service providers and advisers report on climate-related risks and opportunities
Decide which service providers should be responsible for alerting you to emerging climate-related risks and opportunities (such as new government policies that could affect the profitability of certain sectors). Obtain regular updates alongside your regular investment and covenant monitoring reports. The updates will help your decision-making most when they are aligned with your scheme’s short, medium and long-term time horizons.
Include climate-related risks and opportunities in your scheme documentation
Review your current documentation and include risks and opportunities from climate change. For example:
- update your investment beliefs
- include climate risks and opportunities in your risk register
- develop new policies and frameworks if necessary, such as a dedicated set of climate principles or a climate risk management framework
Consider how physical and transition risks, including litigation risks, affect your scheme’s investments
If you are a trustee of a defined benefit (DB) scheme, you should take account of risks and opportunities arising from climate change when considering scheme funding, the employer covenant and any contingent support. Integrate climate-related considerations into your integrated risk management monitoring framework.
Speak with the scheme’s employer
If you are a trustee of a DB scheme, as suggested in the ‘Strategy and scenario analysis’ section, identify climate-related risks to your employer over the short, medium and long term.
Ask your employer how they identify and assess emerging risks to the employer and develop a process for them to alert you to emerging risks, including climate-related risks. You could consider aligning your approach to climate change with your sponsor’s.
Example: processes to identify, assess and manage climate-related risks
The trustees of the GH pension scheme want to ensure they have processes in place to:
- identify and assess climate-related risks
- integrate climate risks into their overall risk management of the scheme
They have delegated oversight of climate-related matters to the Investment Subcommittee (ISC). This is set out in their terms of reference.
The ISC reviews:
- the terms of reference of the scheme’s investment advisers, so they include requirements to advise on climate-related risks and include climate risk in ongoing scheme monitoring reports and climate-related stewardship activities
- proposed amendments to the covenant adviser’s ongoing reporting, so it includes consideration of climate-related risks on the employer’s covenant
- their current investment manager quarterly reports and amendments to include specific reporting on:
- climate-related risks within their portfolios, in line with the short, medium and long-term horizons for their scheme
- engagement, voting and stewardship activities in relation to climate-related matters
The ISC, with support from the scheme’s advisers where appropriate, also:
- asks their investment adviser to report on:
- the climate-related risks they are exposed to through their scheme’s current investment arrangements in line with the scheme’s short, medium and long-term horizons
- the rating of each of their current investment managers’ mandates in relation to climate-related capabilities, risks and opportunities and of their investment managers more generally in relation to climate-related matters
- the rating of each of their current investment managers and mandates held in relation to climate-related engagement, voting and stewardship activities
- agrees to review with their advisers the appropriateness of retaining or amending any existing investment manager mandates where the rating was considered to be poor
- agrees to give climate-related skills and experience a higher priority and weighting in any future selection exercises for an investment manager or investment service provider
- updates their integrated risk management framework and dashboard to reflect:
- climate-related risks to the scheme’s funding, investment and covenant and the materiality of those risks in line with the short, medium and long-term horizons for their scheme
- the relationship between climate-related risks and other scheme risks
- develops a separate climate-related risk and opportunity dashboard to help them actively monitor the scheme’s climate-related risk and opportunities
- arranges for regular reporting of climate-related issues at trustee meetings, with a more detailed review session every year to review progress against targets
- arranges for the full trustee board to be given training on climate-related risks and opportunities
What to report
When reporting on the steps you have taken, you must describe:
- how you identify and assess climate-related risks
- how you manage those risks
- how you have integrated these processes into overall risk management for your scheme
You should also concisely describe:
- the risk tools you have used and the outputs and outcomes of using those tools
- how you have identified, assessed and managed transitional and physical risks for your scheme
- the impact of your assessment on your prioritisation and management of risks
You may also include information on how your stewardship approach has been used, if at all, to help you manage climate-related risks.
Metrics
Issued: June 2021
Last updated: September 2022
Example steps to take
Taking the following actions may help you meet your obligations to calculate metrics.
Select and review your metrics
Use the metrics recommended in the DWP’s guidance to help you select at least four metrics for your scheme, including an absolute emissions metric, emissions intensity metric, a portfolio alignment metric and an additional climate change metric.
Adopt a process to review these at regular intervals or when there is a change in circumstances that makes such a review appropriate, for example, if there’s a significant change in investment arrangements. You could do this alongside reviews of your scenario analysis.
Selecting metrics
Example 1
The trustees of the IJ pension scheme are considering what metrics to select and report on for their scheme. They want to ensure:
- the metrics are objective, understandable, trackable over time and support decision making
- they are consistent and comparable across their portfolio where possible, and given any limits in data
- they understand what a target set against those metrics might look like and the actions that might need to be taken to achieve that target
The trustees review with their advisers:
- the range of metrics available and how they might be applied to their scheme, given the nature of the investments held and the current data limitations
- the types of decarbonisation trajectory they could adopt for their scheme and the actions that would need to be taken to meet those trajectories
The trustees are aware that they need to select at least four metrics:
- an absolute emissions metric
- an emissions intensity metric
- a portfolio alignment metric
- an additional climate change metric
They initially focus on selecting the first three metrics and agree to select and report on the following:
a) Total greenhouse gas (GHG) emissions (absolute emissions metric)
The absolute GHG emissions of their scheme assets should:
- be calculated in line with the GHG protocol methodology
- include Scope 1 and 2 emissions initially (and Scope 3 emissions once required)
- be reported in terms of tonnes of carbon dioxide equivalent (CO2e)
Example target: Reduce net Scope 1, 2 and 3 emissions to zero by 2050, with an interim target to cut emissions by 40% relative to a 2020 baseline by 2030.
b) Carbon footprint (emissions intensity metric)
The volume of total GHG emissions per million pounds invested for the scheme's assets is calculated and expressed in tonnes of CO2e/£M invested.
Example target: Reduce the GHG emissions intensity of the scheme's assets by half by 2030, from a baseline start of 2020. In addition, aim to reduce this intensity by 20% by 2025, in line with their decarbonisation trajectory.
(c) Portfolio alignment metric
This metric compares the alignment of the scheme’s portfolio to the climate change goal of limiting the increase in the global average temperature to 1.5oC above pre-industrial levels.
The trustees are aware that they need to calculate ’as far are they are able, one of three types of portfolio alignment metrics based on either binary target measurements, benchmark performance models or implied temperature rise (ITR) models. Given current limitations, the trustees agree to calculate the portfolio alignment metric initially using a binary target approach and to review their approach as industry methodologies develop.
Example target: To have 100% of the assets held by the scheme by 2030 (or before) invested in assets that are aligned with declared net zero or Paris-aligned targets where they are verified using Science Based Targets.
The trustees agree they will only select appropriate targets for at least one metric once they have:
- completed some initial scenario analysis, as they believe this analysis will help them better understand the climate-related risks and opportunities relevant to their scheme
- reviewed the additional climate change metrics with their advisers and agreed on those they will report on
Example 2
The trustees of the KL pension scheme are considering what additional climate change metric they might select and report on for their scheme. They know they can choose different metrics for different parts of the portfolio, and they can select an alternative additional climate change metric to those listed in the DWP’s guidance if they explain why.
The trustees decide to calculate a range of climate change metrics in line with those listed by the DWP and to apply them to different parts of their portfolio.
Climate value at risk (climate VaR)
This metric provides a forward-looking valuation assessment to measure climate-related risks and opportunities in the trustees’ portfolio over different time horizons. The trustees believe that this analysis will enable them to identify climate VaR exposures and contributions by sector and security level. They also think that this will help them focus their time and resources on the most material issues. It will allow them to review with their advisers whether adjustments to investment holdings should be made to limit exposures to climate-related risks and maximise exposures to opportunities.
Data quality
This measure will calculate the proportion of the portfolio for which Scope 1 and Scope 2 emissions (and Scope 3 emissions once required) are available.
Portfolio exposures
The trustees also agree to calculate some further metrics and monitor progress against these. They include:
- the proportion of assets and/or operating, investing or financing activities that are:
- materially exposed to physical risks
- aligned to climate-related opportunities
- materially exposed to transition risks
- the percentage of scheme asset value exposed to:
- material physical climate-related risks
- material transition risks
The trustees receive a report from their investment adviser, setting out the additional climate change metrics and the basis for those calculations, together with details of the limitations of each of the metrics calculated, including consideration of:
- the potential for model error
- the range of uncertainty in individual metrics
- the potential impact of data availability and comparability between data inputs on the outputs.
The trustees discuss the results and report with support from their investment adviser. They set targets for each of the additional climate change metrics. The trustees believe the targets set are suitable for different parts of their portfolio, allow appropriately for the limitations in their calculation, and future intended investment strategy changes.
Gather data on greenhouse gas emissions ‘as far as you are able’
Establish systems and processes to obtain Scope 1, 2 and 3 greenhouse gas emissions attributable to the scheme’s assets. The data must then be used to calculate your metrics, as far as you are able. This is likely to involve early engagement with service providers and third parties. Use the most recent data available, even if the data is not from the current year. Document the steps you have taken, including engagements with your service providers. This may help demonstrate why you were not able to obtain some data.
Where it has been difficult to obtain data for your first reporting period, you should fill gaps as far as you are able. For example, use estimated or proxy data and then develop a plan for improvements in future.
If your asset manager is only able to provide data for part of your portfolio, develop a plan and timetable for improvement. Be aware that the quantity and quality of the data available should improve for future reporting periods.
Use the metrics to inform risk management
As with other activities in this guidance, use your work here to develop other aspects of your governance of climate-related risks and opportunities. As far as you are able, use the metrics to identify those parts of your portfolio more exposed to climate-related risks and prioritise your actions.
Consider the extent to which the metrics you have used have been limited by data constraints and the impact this might have on decision making.
Document how you have used the metrics, the advice you have taken, and any relevant outcomes, such as whether they led to changes in your investment strategy or in implementing investment arrangements or your scheme procedures.
Example: using a metric in risk management
The trustees of the MN pension scheme are concerned that significant exposure to fossil fuels represents a reputational risk for the employer and potentially exposes them to losses in their investment portfolio from stranded assets.
Their employer’s business is heavily dependent on its ethically-focused branding. The trustees have taken covenant advice and believe that exposure could damage the employer’s reputation, present a material risk to the employer covenant and undermine the security offered to the scheme.
They decide to measure the exposure of the scheme’s investments to fossil fuel revenues as an additional climate change metric.
To calculate the metric, the trustees identify investments with direct exposure to fossil fuel extraction (oil, coal and gas) and energy generation from fossil fuels.
The trustees have an existing engagement policy, which forms part of their Responsible Investment policy. Having identified their portfolio exposures to fossil fuels, they further develop their Responsible Investment policy with their investment adviser to make clear their policies on engagement, exclusions and disinvestment.
The trustees agree on new investment beliefs, including that:
- an effective program of stakeholder engagement, including collaboration with other like-minded investors, can help to manage climate-related risks and opportunities
- while effective engagement can serve to reduce climate-related risk, in some instances, the level of risk may support disinvestment or exclusion of new investments
- investments in certain sectors may be financially unsuitable over the long term, and the risk from those investments may be too high; those sectors should be excluded where possible
The trustees take legal advice on the revised policy to ensure that it does not conflict with their fiduciary duties. They agree that:
- they will ask their investment adviser to set out
- how their revised policy affects their current fossil fuel exposure
- how they should manage their current exposures through a combination of engagement and divestment or exclusion, if appropriate and in line with their fiduciary duties
- the timescales they recommend should be set for disinvestment and engagement
- the social impacts of implementing their revised policy decisions
- how their current investment manager mandates should be adjusted to reflect their revised policy
- they will prepare a briefing for members setting out the approach they have adopted once they received advice and finalised their policy views
- they will keep their policy on exclusions, engagement and disinvestment under regular review
What to report
When reporting on the steps you have taken, you must describe:
- the metrics you have calculated
- if you have been unable to obtain data to calculate the metrics for all of the scheme assets, why this is the case
You should also:
- use the metrics recommended by the DWP, or explain why you have not done so
- explain the methodology you have used for each metric, including those of any asset managers or third-party service providers and the reasons for the adopted approach
- describe the key components of the methodology used in calculating the portfolio alignment metric, including key assumptions and how data gaps are allowed for
- when reporting total greenhouse gas emissions and carbon footprint:
- state the proportion of assets for which data was available
- indicate if any data was estimated or of uncertain quality, giving reasons why
- indicate if you made any assumptions that could significantly impact the results
- report your absolute emissions in the amount of CO2 equivalent
- set out the Scope 1 and 2 emissions of assets separately from Scope 3 emissions for each DB section and each popular DC arrangement
If you believe it is not meaningful to aggregate data across certain asset classes. you should:
- only report at the most aggregated level that remains meaningful
- also report the proportions of the scheme assets associated with each reported metric
You may also choose to:
- report Scope 1 and Scope 2 emissions of assets separately
- disclose some or all of your metrics against a relevant benchmark. This could help identify the relative performance of your portfolio
Targets
Issued: June 2021
Last updated: September 2022
Example steps to take
Taking the following actions may help you meet your obligation to set a target.
Select an appropriate target
Select a target for at least one of your metrics. Targets should reinforce risk management, be scheme-specific, and not be chosen arbitrarily.
You may use more than one target if it is relevant to your investment strategy and the way you want to manage climate-related risks and opportunities. You could set more than one target on the same metric for different parts of your scheme portfolio or over a series of time periods, or you could set different targets on other metrics.
Example: selecting a target
The OP pension scheme has a complex investment strategy. The trustees have been advised that their climate data coverage is currently around 30% across their total scheme assets and that the techniques to effectively calculate emissions metrics for some of the assets and derivatives held are very limited.
The trustees know that they must report on at least one target for their scheme. They know that the target is not legally binding and should not hinder their fiduciary duties. The trustees decide to select one emissions target to disclose and agree to set a series of additional internal targets to help increase the extent and quality of future reporting.
The trustees want additional targets to be realistic and relevant to their evolving scheme arrangements. They discuss how they expect the scheme’s investment arrangements to develop in the short term with their advisers. Following those discussions, they understand that:
- they expect to begin a series of buy-in transactions, with around 20% of the assets expected to transfer in the first year
- around 15% of their total scheme assets are held in private market funds, which will mature uniformly over the first three years and need to be reinvested
- data coverage would improve by around 10% in the first year as the regulatory requirements to disclose take effect
The trustees believe that engagement with service providers, investments held and counterparties, could play a significant role in improving data and analytical coverage. It could also help reduce the underlying climate-related risk in certain investments held.
The trustees ask their advisers to:
- produce a table outlining the scheme’s material holdings and highlighting the data and analytical gaps they believe are most material to climate-related risks
- overlay that table with an assessment of where engaging with data coverage might have the most material impact and also where engaging with individual investments might have the most impact on material climate-related risks
With support from their advisers, the trustees use the table to help them set a range of targets that are realistic and allow for the future development of the scheme. The trustees understand how those individual targets might be achieved and set specific objectives, including engagement objectives, around them. They set the current scheme year as their reference year.
Set a framework for delivering against your targets
Define a reference base year and a time period for meeting your targets.
You will be able to manage climate risks and opportunities more effectively with a framework that includes interim targets. If you set a long-term target of more than 10 years in the future with no interim targets, we would expect you to explain why in your report.
Engage with your service providers
As with other activities in this guidance, discuss your targets with your service providers and jointly review how your scheme’s plans fit with their terms of appointment.
Example: monitoring progress against a target
The trustees of the QR pension scheme have previously calculated a weighted average carbon intensity (WACI) metric. They monitored progress and tried to lower the carbon intensity of their investments compared to the asset class benchmark. Not all relevant data was available, so the trustees made approximations for a material part of their scheme assets. They believed that the carbon intensity of their scheme portfolios was around 30% lower than the benchmark. Having taken advice from their investment adviser, they developed their proposed decarbonisation trajectory up to 2030 for their scheme portfolios based around that starting position.
The trustees decide to disclose a WACI target in their climate report and explain their reasoning for using this metric when they report. They have recently been able to access better quality data for a material part of their investment portfolio and recalculate the metric to find that the carbon intensity is only 15% lower than the benchmark.
The trustees instruct their investment adviser to prepare a report on how they could reduce their carbon intensity by 15% by 2023 relative to the benchmark to align with their decarbonisation trajectory up to 2030.
The trustees currently hold a material amount of scheme assets in a real asset portfolio and are concerned that, due to data limitations and approximations, the carbon intensity of their scheme portfolios could be underestimated. They instruct a specialist adviser to help them understand and reduce the operational carbon and energy intensity in their real asset portfolio.
The trustees also set additional objectives:
- to invest a percentage of their assets in renewables and clean technology by 2025
- to identify significant concentrations of exposure to carbon-related assets in their portfolio
- to develop a management and mitigation plan where concentrations of exposure exceed a threshold
The trustees acknowledge that the targets they set are aspirational. The targets should enable them to manage material climate-related risks but are not legally binding. They agree to implement changes only when they have received advice from their investment adviser that the changes and their implementation are appropriate and consistent with their duties under the scheme’s trust deed and rules and the investment regulations.
The trustees also agree to seek additional legal advice to ensure that any targets set, and the implementation of those targets, does not conflict with the trustees’ fiduciary duties.
What to report
When reporting on the steps you have taken, you must describe:
- the target you set in relation to at least one of the metrics you calculated
- as far as you are able, your scheme’s performance against that target
You should also describe concisely:
- the steps you are taking to achieve your target (or targets)
- the method you used to measure performance against your target (or targets) and any estimates you relied upon
- if you have replaced or missed a target, a brief explanation why
Publishing your report
Issued: June 2021
Last updated: September 2022
Read paragraphs 1 to 20 of part 4 of the DWP’s statutory guidance for more on how and where you must publish your climate change report and how you must notify members. A summary is required is set out below.
This includes specific requirements regarding publication on a publicly available website, free of charge.
You must produce and publish your report within seven months of the end of any scheme year in which you were subject to the requirements unless you are exempt as described in Regulation 6(2).
Your report should include a plain English summary of your main findings.
The report must be signed by the chair of trustees, although you do not need to publish the signature.
You need to include the website address where the report has been published in your scheme return.
This website address must also be included in your Annual Report. You should also include a short summary explaining where the link will take the reader. You may also wish to include a brief explanation of what the climate change report is, why it is important, and a high-level summary of the main findings.
A statement that the report is available on a website, together with the website address and details of where to find and how to read the information, must also be included in the Annual Benefit Statement and, where relevant, the Annual Funding Statement.
Examples of factors to consider in order to take into account the needs of disabled people can be found on paragraphs 13 to 17 of part 4 of the DWP’s statutory guidance.
Appendix 1: a step-by-step example of following the climate change guidance
Last updated: September 2022
About this example
This example illustrates the types of steps that you and your advisers could consider taking as you work through the requirements of the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions) Regulations 2021 (the climate change regulations).
It could be helpful to you if:
- you are currently required to comply with the climate change regulations
- you are not currently required to comply but want to do more to manage your scheme’s climate-related risks and opportunities
The example is intended to help develop your understanding of how you might approach implementing the climate change regulations at a practical level. However, it is not intended to be used as a checklist. The governance structures of schemes, the skillsets of their trustees and their investment implementation arrangements vary significantly. The processes you put in place and the actions you take to understand and address the risks and opportunities that climate change poses to your scheme should reflect your individual scheme arrangements.
We expect you to take appropriate advice and ensure that the approach you adopt to meeting the requirements of the climate change regulations is suitable for your scheme.
On this page
- About the XYZ pension scheme
- The trustees’ first steps
- Developing the base case
- The impact of scheme data
- Meeting the requirements on governance
- Meeting the requirements on strategy and scenario analysis
- Meeting the requirements on risk management
- Meeting the requirements on metrics
- Meeting the requirements on targets
- Documenting their approach
- Completing and publishing the report
About the XYZ pension scheme
The trustees of the XYZ scheme are starting to review how they might approach meeting the requirements of the climate change regulations which apply to their scheme.
The XYZ scheme has three separate sections.
- A very mature defined benefit (DB) section, closed to accrual.
- An immature DB section, open to accrual but closed to new entrants.
- An open defined contribution (DC) section, growing rapidly.
DB scheme sections
- The trustees have a well-diversified, well-hedged, complex investment strategy in place for both DB sections.
- The investment strategy is invested across a wide range of investment mandates and fund structures.
- The DB sections hold a mixture of segregated mandates, pooled funds and other collective investment vehicles. The scheme also has significant exposure to private market investments.
- The trustees have completed one buy-in transaction with an insurer in relation to the very mature DB section. They plan to carry out further transactions in the medium term.
Table 1: the high-level asset allocation of the DB scheme sections
| Asset class | Immature section asset allocation | Very mature section asset allocation |
|---|---|---|
| Equities: UK | 3% | 1% |
| Equities: overseas | 31% | 6% |
| Equities: unquoted private equities | 2% | 0% |
| Equities: derivatives | 1% | 0% |
| Sovereign bonds: fixed interest | 12% | 18% |
| Sovereign bonds: inflation-linked | 21% | 38% |
| Corporate bonds: fixed interest | 7% | 12% |
| Corporate bonds: inflation-linked | 1% | 1% |
| Property | 5% | 2% |
| Alternative assets | 7% | 15% |
| Pooled Funds/CIVs | 9% | 0% |
| Insured annuities | 0% | 6% |
| Cash/cash equivalents | 1% | 1% |
| Total | 100% | 100% |
The scheme’s employer covenant is rated ‘tending to weak’, and the employer operates across several industry sectors. The employer’s business activities are well-diversified, but their supply chain is significantly dependent on carbon. However, the employer is now developing plans to lower the carbon dependency of the business in the future.
The DB sections are currently underfunded, and a 10-year recovery plan is in place, which is back-end loaded. The trustees currently have a long-term objective of being funded on a low dependency basis after 20 years.
The durations of the two DB sections’ liabilities are around 10 years (very mature section) and 24 years (immature section).
DC section
The asset allocation of the default arrangement of the DC section varies depending on how far away a particular member is from the state pension age (SPA).
Table 2: the main default fund’s asset allocation at 30 and five years before a member reaches SPA
| Asset class | 30 years to SPA | 5 years to SPA |
|---|---|---|
| Equities: UK | 10% | 7% |
| Equities: overseas | 65% | 38% |
| Sovereign bonds: fixed interest | 6% | 12% |
| Sovereign bonds: inflation-linked | 2% | 9% |
| Corporate bonds | 5% | 20% |
| Property | 5% | 4% |
| Other | 6% | 6% |
| Cash | 1% | 4% |
| Total | 100% | 100% |
The trustees also offer a range of self-select funds, but few DC members invest through them. As a result, the value of the scheme’s investments in each self-select fund is relatively small.
There are two groups of members in the DC section.
- Members with only DC benefits.
- Members with both DC benefits and legacy DB benefits (in the very mature DB section).
The trustees are considering setting up a decumulation option within the DC section. They expect the scale of assets relating to retiring DC members to start to increase materially within the next three to five years.
All DC investments are made through pooled funds, and around 85% of the assets are passively managed. The self-select funds are actively managed and include options for investing in property, corporate bonds, emerging markets and some multi-asset funds.
The funds do not currently have any specific environmental, social and governance (ESG) or climate credentials and the passive funds are benchmarked against market capitalisation indices. However, the passive fund manager has a strong ESG team and adopts a robust approach to engagement.
The trustees have access to some in-house investment advice and get additional investment advice from an external adviser as they need it.
The trustees’ first steps
Introductory training
The trustees know that there have been significant developments in relation to climate-related regulations, expectations and analysis. They understand that new requirements for knowledge and understanding in relation to climate change apply to trustees of schemes that are subject to the requirements under the climate change regulations. They also know that they need to develop their level of knowledge and understanding. They discuss the issue with their advisers and decide to develop a series of training workshops.
The workshops start with a high-level overview of their new responsibilities. The trustees outline some of the topics they feel are important to be aware of when addressing their climate responsibilities. Their initial list includes:
- the new legal obligations: an overview of the climate change regulations and related requirements
- fiduciary duty: how their new responsibilities in relation to climate change risks and opportunities interact with and support their fiduciary duties
- greenwashing: how that might be identified and addressed in service providers and investment products
- investment beliefs: how their current investment beliefs might inform their approach to climate-related matters and how and why those investment beliefs might need to be further developed
- climate-related risks and opportunities: some examples over different time periods and in the context of other ESG and scheme risks
- the role of engagement: how trustees or their service providers should engage with the companies and funds that they own in relation to climate-related issues
- a Just Transition: whether and to what extent the trustees could seek to support this through their policies and scheme arrangements, taking account of member views
- the practical implications of applying the climate change regulations to their scheme: the high-level implications of what that would mean in terms of changes, resources and other factors
- adopting a net-zero target: whether that might be appropriate, how it might be achieved, and the high-level implications of what that would mean
Next steps
After completing the first overview workshop, the trustees understand the scale of the work involved and what additional training is needed.
The trustees complete an individual questionnaire, provided by their advisers, to help inform the development of a training programme. They ask their advisers to prepare the programme prioritised according to the likely timescales of the work they need to complete.
Developing the base case
The trustees understand that they will need to make some changes to:
- their governance framework
- their arrangements with scheme service providers
- implementation aspects of their investment and funding arrangements
- the detail of their risk monitoring arrangements
They also understand that they will need to obtain data to carry out scenario analysis and to calculate metrics. However, some asset holdings have material data gaps, and analysis techniques are still being refined.
The trustees want to start with a business-as-usual scenario to understand how, over future time periods, each section of the scheme might develop and continue to be supported by the employer covenant and be serviced by key service providers. They ask their advisers to set out how they expect the three sections of the scheme to develop over future time periods.
This helps them understand the following.
- The very mature DB section might be managed down and run off through a series of future buy-in transactions and benefit payments. It also helps them understand the time period over which that might happen.
- The immature DB section might continue to grow for some years before starting to mature. It will then start to run off and be managed down over an extended period.
- The DC section might continue to expand. They also understand how the addition of a decumulation option might extend the time horizon of the scheme over which members’ benefits might be paid.
It also enables them to discuss with their advisers:
- how they might expect their investment strategy and investment implementation arrangements to develop
- what they might expect their level of reliance on the employer covenant to be at different points in the future
- what the impact of a downgrade in the employer covenant might be on future funding and investment arrangements
- what the outlook is for the sectors the employer operates in and how the employer covenant might develop in those sectors
To gain further insight, with support from their advisers, the trustees add some high-level qualitative views based on their knowledge of the business and the scheme investment arrangements to that analysis. This will help them understand what the practical impacts might be on their scheme investment and funding arrangements under a range of plausible climate scenarios.
Next steps
The trustees acknowledge that they will need to complete much more detailed analysis as they address the requirements of the climate change regulations.
The impact of scheme data
The trustees understand that they have a significant amount of work to do to address climate-related issues within their scheme investment arrangements.
They want to focus their time and resources on the investment managers, investment mandates and individual direct investments within their scheme that have the potential to have either the most material impact on their climate risk, or on their ability to carry out the climate risk analysis. They also want to engage to a greater extent in stewardship with the investments they hold.
To do this, they need relevant data.
Assessing and improving data quality
The trustees ask their investment adviser to provide an overview of what climate-related data is available and its current limitations. They also ask them to outline how the data might be expected to improve through purchasing better sources of data, improved statutory disclosure in the future, effective engagement with investment managers and others, and expected changes in the scheme’s investment holdings and implementation arrangements.
They also ask their investment adviser to highlight where engaging with investment managers and other service providers might help them address the data limitations that have the most material impact on their ability to identify, assess and manage climate-related risks and opportunities.
Analytical limitations
The trustees know that there are some significant challenges with the assessment of climate-related risk for some asset classes, such as private market assets. They are also aware that market practices for analysing climate-related risks and opportunities for some investment holdings, such as derivatives, have not yet been agreed upon.
They ask their adviser to:
- produce a report setting out the extent to which they believe they can complete the analysis required by the climate change regulations
- set out how the analytical limitations may affect some of the work they need to do to meet the requirements of the climate change regulations
- identify any asset classes and holdings that present specific challenges in completing the analysis
The trustees understand that climate data is evolving, and analytical limitations are reducing. They also know they are expected to take a proportionate approach to managing climate-related risks and opportunities, particularly in relation to time and cost, when seeking to comply with the climate change regulations.
They ask their adviser to overlay their report with a view on the materiality of the individual climate-related issues they have identified. With this, the trustees can prioritise their efforts on the issues that are likely to make the most difference to their ability to accurately assess the level of climate-related risks and opportunities relevant to their scheme.
Next steps
The trustees use the advisers’ reports to develop a programme of engagement with their investment managers and service providers. They prioritise the data and analytical issues they expect to have the most material impact on either their climate risk or their ability to carry out that climate risk analysis.
Meeting the requirements on governance
Establishing and maintaining oversight
The trustees understand that they have ultimate responsibility for ensuring effective governance of climate-related risks and opportunities. They also know they must establish and maintain oversight of climate-related risks and opportunities.
The scheme’s Investment Sub-Committee (ISC) has previously developed the scheme’s Responsible Investment policy. They had also previously considered ESG issues – including some thematic climate aspects – to some extent, during the selection of investment managers for the DB sections and as part of ongoing monitoring and regulatory requirements.
The trustees are aware that they need to demonstrate that their own oversight of climate change risks and opportunities is sufficient. However, the trustees believe the ISC is best placed to lead on developing proposals to address the new climate change requirements regarding scheme governance and reporting. They agree to delegate primary responsibility to the ISC subject to the ISC:
- clearly setting out the work they expect to do and when they expect to do it
- reporting back regularly
- working with the scheme’s investment, covenant, actuarial and legal advisers in developing the proposals
- arranging for additional training for all the trustees to help with any important decisions arising from the proposals
- bringing the final proposals back to the full trustee board for review and approval
In developing their proposals, they also ask the ISC to engage with the other trustee committees to highlight issues for consideration or development. They suggest that they form separate working groups when it is appropriate. The trustees then update the Terms of Reference for the ISC.
Updating of investment documentation
The trustees had previously discussed and agreed on a set of investment beliefs, which set out how they believed investment markets functioned and which factors could lead to good investment outcomes. Their investment strategy reflected those investment beliefs. It also helped to focus their investment decision-making and make it more effective.
The trustees review their investment beliefs regularly and in response to material developments to ensure that they remain relevant. The trustees now believe that climate change is a systemic risk that poses a material financial risk to the scheme, the sponsor and the investments held. The trustees agree that the ISC should develop some additional climate-related investment beliefs and a new climate change policy for discussion and agreement with the full trustee board.
The ISC, with support from the scheme’s advisers, updates the trustees’ investment beliefs and develops a separate climate change policy, which they intend to submit for discussion with the trustee board.
Investment beliefs
They add the following beliefs.
- The scientific consensus supports the finding that limiting global warming to 1.5°C would require:
- rapid and far-reaching transitions in land, energy, industrial buildings, transport and cities
- emissions of carbon dioxide to fall by around 45% from 2010 levels by 2030 and to reach net-zero by 2050
- If average global temperatures rise above 1.5°C, as outlined in the Paris Agreement in 2015, many climatic impacts will switch from being destructive to catastrophic.
- Climate change is a financially material risk, presenting both opportunities and risks to members’ long-term outcomes.
- Every investment decision should include an assessment of the impact of climate change risks and opportunities.
- The transition to a low-carbon economy will require significant amounts of private capital. Private market investments should be one key area to focus on when seeking to identify climate change opportunities to invest in.
- Climate change is only one dimension of ESG and only one aspect of risk and opportunity.
- Climate change should not be considered in isolation. It should be fully integrated with scheme ESG and risk management policies.
- The response to climate change presents significant transition risks. Different stakeholders will be affected in materially different ways. Consequently, the trustees should consider:
- social impacts and the risks and opportunities they represent when making investment decisions that are informed by climate risks and opportunities
- engaging with their investment managers on the topic of a Just Transition
- encouraging investee companies to take account of social issues and risks when making climate-related investment decisions
- If global warming is to be limited, real-world carbon emissions will have to reduce. However, implementing a low carbon portfolio footprint (in the short term), through selective divestment and investment, will not change the underlying systemic risks on its own as:
- carbon-intensive sectors need significant investment to transition
- a decarbonised world is likely to lead to more positive outcomes for members than a decarbonised portfolio on its own
- active engagement on climate change and other environmental factors can have a significant impact on future outcomes for members
- Although engagement on climate change and other environmental factors can be effective, there are limitations to engagement. In some cases, it may be appropriate to consider exclusion and divestment, subject to:
- considering how the risk of holding those investments might increase as the global economy transitions to net-zero carbon emissions or due to policy or consumer actions
- any decisions to either disinvest where there are concerns about climate-related risks or to invest where there is a climate-related opportunity not being driven purely by climate-related issues. These decisions must take all other relevant considerations into account and be consistent with the scheme’s investment objectives and in accordance with the trustees’ fiduciary responsibilities
Climate Investment Policy
The trustees support:
- seeking investment opportunities that take into account the objectives of policymakers, as set out in the Paris Agreement, to limit the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels
- the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)
- the development of robust climate change policy frameworks – both in the financial sector and in the real economy – by policymakers
- active collaboration with the wider investment community and investor coalitions on climate change issues
- engagement, with clear objectives, time horizons and consequences as an effective tool
- investment in companies that can demonstrate that they:
- have identified how they might be affected by both the physical and transition risks arising from climate change
- have set clear objectives
- are delivering against those objectives and remain well-placed in an economy that is expected to transition in line with the objectives of the Paris Agreement
- the development of industry practices and consistent data and analytical approaches to enable effective risk management of climate change issues
- the effective management of climate-related risks and opportunities affecting the scheme and its investment and funding policies within the context of their fiduciary responsibilities
The trustees expect their investment managers to:
- understand and integrate financially-material climate-related risks into their analysis and investment processes
- engage with companies on climate-related issues
- be able to provide a robust investment rationale where high carbon emission companies are held as part of a portfolio or strategy
- seek to support – through their investment decisions – the transition to a low carbon economy, provided the investments made fit within the risk and return parameters the trustees have set in the investment managers’ mandates, so are consistent with the trustees’ fiduciary duties
- have clear policies on engagement, including on the use of exclusions or divestment
- continue to improve the quality, clarity, and consistency of climate-related data they provide in relation to the funds in which the scheme invests
- actively collaborate with the wider investment community on climate change issues
The trustees intend to:
- set a net-zero emissions target by 2050, in line with the Paris Agreement's objective of limiting the rise in temperature to 1.5°C by 2050
- review the 2050 target as knowledge, data and analysis of climate-related issues improve, and adjust it, if appropriate, in line with the scheme’s investment objectives and their fiduciary responsibilities
- develop a clear plan, with robust interim targets set at five-yearly intervals, to achieve the net-zero emissions target
- review the investments they are holding or expect to hold in the future to ensure that they are in line with their net-zero emissions target
- develop, with support from their advisers, a formal policy for effective engagement on climate-related matters, including timescales for engagement and details of when restrictions and exclusions might be applied to their investment mandates, where the fund structures allow
- actively collaborate with the wider occupational pension scheme community, for example the Institutional Investors Group on Climate Change, the Occupational Pension Stewardship Council, the UK Sustainable Investment and Finance Association and others
- review and evolve their climate policy regularly in light of market developments
The ISC also make the following proposals to the full trustee board.
- The trustees update the scheme’s Statement of Investment Principles and Responsible Investment policy to reference the new climate policy.
- The trustees integrate climate-related risk and opportunities into their:
- business plan and meeting cycle
- risk register
- risk management framework and monitoring dashboard
- The trustees should engage with their scheme’s sponsor on an ongoing basis to understand how they are addressing climate-related issues relevant to their business and how the sponsor’s ability to support the scheme might be affected by climate-related issues in the future.
- A climate risk and opportunity dashboard is developed for the scheme.
- Climate and ESG-related capabilities are given high weighting during the selection of future investment service providers.
- They consider the ability to provide climate-related data and analytics appropriate for climate-related reporting during the selection of future investment service providers.
- Any future risk transfer exercises, such as buy-in transactions, should take into account the insurers’ climate and ESG-related capabilities and their ability to provide climate-related data and analytics.
The ISC also highlight that the application of all these proposals will be subject to the requirements of the trustees’ fiduciary responsibilities.
Existing investment arrangements
The scheme currently:
- invests the DB assets across a range of asset classes, sub-asset classes, investment managers and fund types
- retains a fiduciary manager for a legacy portfolio of alternative assets in the very mature DB section, which was taken on following a scheme merger
- uses a wide range of derivatives, including interest rate swaps, futures and forwards, and equity and credit derivatives in the DB sections and a limited range in the DC section
- holds some other risk management products, including a buy-in policy in the very mature DB section
- retains a platform provider in relation to the DC section
The trustees know that reviewing the capabilities of their existing investment managers, fiduciary manager, investment service providers and investment and risk product counterparties will take a lot of resource. They ask their investment adviser to prepare a high-level report that:
- assesses the capability of their existing providers of investment management and fiduciary management services to identify and assess climate-related risks and opportunities relevant to the scheme
- sets out their effectiveness and suitability in relation to the management of climate-related investment mandates
- identifies the extent to which current gaps in the individual services provided are material to climate-related risks and opportunities relevant to the scheme
- identifies where the service provider may be able to offer alternative products, for example, funds managed against climate transition aligned benchmarks
- sets out which investment managers and asset class investments would be expected to be retained and which would be replaced in the short term, as part of their ongoing development of the investment strategy
- sets out which investment managers and asset class investments might be subject to review in the short term due to performance-related issue
Using that report, the trustees complete the following actions.
- They identify some service providers who may need to be reviewed or divested from in the future. This is based on their having a limited capability to assess climate-related risks and opportunities or other issues relating to their performance or both.
- They set priorities for engagement with their service providers based around those services likely to have the most material impact on climate-related risks and opportunities relevant to the scheme.
- They write to all ongoing service providers setting out their high-level expectations. They indicate that they plan to work with them on climate-related issues over the near term.
Assessment and oversight of service providers and advisers
The trustees understand they must establish and maintain processes to satisfy themselves that their service providers and advisers (excluding legal advisers) take adequate steps to identify and assess climate-related risks and opportunities that are relevant to the scheme for the matters on which they are advising.
The scheme’s external investment adviser has previously provided the ISC with details of how they think they performed against the Investment Consultancy Sustainability Working Group (ICSWG) Competency Framework template. The ISC were satisfied with that submission. However, they believe the competency of the adviser should be annually reviewed as their own climate-related knowledge develops and general industry knowledge, analysis, and resources improves.
The ISC:
- update the objectives they set for their investment adviser
- request that ongoing investment performance and risk monitoring reports are updated to allow fully for:
- climate-related risks and opportunities, including those arising from policy developments
- investment manager developments in relation to climate-related issues
- investment manager engagement and voting activity in relation to climate-related issues
- developments in the quality and quantity of climate-related data provided by their investment managers and investment service providers
- propose some adjustments to the investment adviser’s service contract
The trustees ask their scheme’s covenant and actuarial advisers to set out:
- how they identify and assess climate-related risks and opportunities relevant to the scheme for the matters on which they are advising
- their capability and resourcing in relation to climate-related issues on which they advise
- how they propose to adjust their reports to the trustees in the future
- what changes (if any) they believe are necessary to their current services agreements
The ISC then considers the covenant and actuarial advisers’ submissions in the context of the new governance requirements under the climate change regulations. They are then submitted to the trustees for further consideration and review. The trustees then propose some adjustments to their covenant and actuarial advisers’ service agreements.
Next Steps
The trustees:
- review the proposals from the ISC and suggest some changes
- delegate responsibility for implementing the investment and risk-related proposals to the ISC
- request progress updates to be provided at future trustee meetings
- review and agree on the proposals from the covenant and actuarial adviser, subject to some changes
- agree that, because knowledge, data, analytical techniques and practices in this area are evolving rapidly:
- the ability of their advisers to support them on climate-related issues relevant to the scheme should be subject to annual review
- the processes and oversight arrangements they put in place concerning climate-related risks and opportunities should be subject to annual review
- agree that climate-related capabilities should be given high weightings in future investment service or selection exercises for risk transfer providers, subject to the ISC and trustees operating in the context of their fiduciary responsibilities for any such appointment
Meeting the requirements on strategy and scenario analysis
The trustees understand that they must, on an ongoing basis, identify climate-related risks and opportunities which they consider will have an effect over the short term, medium term and long term on the scheme’s investment strategy and, where relevant, the scheme’s funding strategy.
Following their work on developing the base case, the trustees believe that the appropriate short, medium, and long-term periods for the individual sections of their scheme should be set as outlined in the tables below.
Short-term
| Section | Time period (years) | Reasoning |
|---|---|---|
| Very mature defined benefit | 3 | They intend to buy in additional liabilities with an insurer and more generally, to restructure their investments to align with those that an insurer might hold. |
| Immature defined benefit | 5 | They expect to take high-level, climate-related investment and funding decisions over this period, pending changes in the quality of climate change data and in climate regulations. |
| Defined contribution | 5 |
Medium-term
| Section | Time period (years) | Reasoning |
|---|---|---|
| Very mature defined benefit | 5 | They expect to take high-level, climate-related investment and funding decisions over this period, pending changes in the quality of climate change data and in climate regulations. |
| Immature defined benefit | 10 | They believe that significant changes will need to be made by 2030 to limit global warming to 1.5°C above pre-industrial levels. |
| Defined contribution | 10 |
Long-term
| Section | Time period (years) | Reasoning |
|---|---|---|
| Very mature defined benefit | 10 | This time period is in line with the duration of the liabilities of the very mature DB section. |
| Immature defined benefit | 24 | This time period is in line with the duration of the liabilities of the immature DB section. |
| Defined contribution | 30 | In line with a target of net-zero around 2050. |
The trustees agree to review these periods annually in light of scheme and industry developments.
The trustees also need to assess the impact of the climate-related risks and opportunities they have identified on their investment and funding strategy on an ongoing basis. They make the following requests.
They ask their investment adviser to include an update on material climate-related risks and opportunities that will affect the investments for each section of the scheme, across the time periods selected for each section, in their ongoing investment performance and risk monitoring reports. They ask that the update also includes:
- identification of any material new climate-related risks or opportunities, for example, following the introduction of new climate policies in any key markets, sectors, countries, or regions
- a high-level assessment of the potential impact of any new material climate-related risks and opportunities
- a recommendation for any actions the trustees should consider to either take advantage of those opportunities, or to understand, manage or mitigate those risks
They also ask their investment adviser to include, where possible, an assessment from several of their investment managers on the outlook for the sectors the employer operates in and its position within those sectors, over the different time horizons selected for the DB sections.
They ask their covenant adviser to include an assessment of the impact on the employer covenant of climate-related risks and opportunities across the time horizons for each DB section, and monitor this in their regular covenant updates.
They ask their scheme actuary to include an assessment of the potential impact of climate-related risks and opportunities in their funding strategy updates for the DB sections.
Scenario analysis
The trustees arrange for their advisers to run a workshop on scenario analysis covering:
- the application of quantitative or qualitative scenarios
- options for completing the analysis, including the use of third-party providers
- the difference between a ‘top-down’ and ‘bottom-up’ approach to scenario analysis
- the data requirements for the different approaches (and the extent of any current limitations on data availability affecting the scheme)
- the availability and credibility of representative scenarios
- the limitation and utility of current scenario modelling
- factors that might influence the choice and range of scenarios, including:
- the level of global average temperature increase to use
- the type of transition, for example, orderly or disorderly
- the types of climate-related risks that might have more impact over different time periods, for example, physical risks at longer horizons
- the trustees’ climate-related investment beliefs
- integration of the investment impacts with the potential effect on the scheme’s funding strategy under different scenarios, including the impacts on
- the scheme’s liabilities
- the employer covenant
- how scenario analysis might be applied to their scheme and the individual sections within it
Following the workshop, the trustees agree to further actions.
- Some initial qualitative scenario modelling, based around an increase in the price of carbon of different amounts, at different time periods, and allowing for how this might affect the employer’s business.
- As far as they are able, some more detailed scenario analysis using a range of representative scenarios set out by the Network for Greening the Financial System, based on three initial scenarios.
- An orderly 1.5°C scenario. This will meet the requirement under the climate change regulations to undertake one scenario with a global average temperature increase within the range of 1.5°C to 2.0°C above pre-industrial levels. They decide to use 1.5°C as this aligns with their net-zero ambition.
- A disorderly 2.0°C scenario. They believe broader action on climate change may need to happen, for example, around 2028 to 2030, if the actual level of global decarbonisation achieved is significantly less than that required by 2030 under the Paris Agreement.
- An orderly 2.5°C scenario. This is closer to the best estimates of 2.6°C to 2.7°C warming by 2100 that some market commentators believe will be the outcome from COP26. They believe that this scenario will also give them some insight into the potential physical impacts and risks that longer-term, high temperature scenarios might have.
After the initial scenario modelling, the trustees have developed an understanding of the following areas.
- What the potential impact of a range of alternative global average temperature increases might be on the scheme’s assets and funding strategy.
- How the effects may vary across:
- different time horizons
- individual asset classes, sub-asset classes and material holdings
- liabilities with different characteristics, for example, fixed versus inflation-linked
- How steps taken by governments, for example, setting a price for carbon or accelerating policy developments, could influence scenario outcomes.
- The potential impacts of different temperature scenarios on the employer’s business, considering any mitigating actions or transition plans that management is implementing.
- The type of amendments to their existing investment strategy and the implementation arrangements for that strategy, that might improve the scheme’s resilience.
- The changes in their scheme funding arrangements or contingent security provisions that they might need to consider with their employer in the context of the potential impact of climate change on the employer covenant over time.
- How the DC investments might perform under different scenarios and what the impact of climate-related risks and opportunities might be if no changes were made to the current investments.
- What the impacts might be on the individual member pots, under different scenarios, for a selection of members of different ages, for each popular arrangement1 within the DC section.
Next steps
The trustees:
- discuss the implications of the output from the modelling with their advisers and employer
- consider, with their advisers, whether they need to run any additional scenarios
- agree on some changes to the current investment strategy and implementation arrangements for the DB and DC sections
- use some of the results of the modelling in their communication with scheme members about work the trustee has done on climate risks and opportunities
- agree to review the scenario modelling annually and update it at the end of a three-year period or earlier if there are material developments affecting the scheme, available data, or analytical techniques
Footnote for this section
[1] A popular default arrangement is considered to be one in which £100m or more of the scheme’s assets are invested, or which accounts for 10% or more of the assets used to provide money purchase benefits (excluding assets which are solely attributable to Additional Voluntary Contributions) - Governance and reporting of climate change risk: guidance for trustees of occupational schemes
Meeting the requirements on risk management
The trustees understand that they must:
- establish and maintain processes that will enable them to identify, assess and effectively manage climate-related risks which are relevant to the scheme
- ensure that management of climate-related risks is integrated into their overall risk management of the scheme
The trustees and their advisers believe that these requirements have now been met following their review of their governance and oversight arrangements. They believe this for the following reasons.
- The terms of engagement for their advisers now require them to report specifically on climate-related risks, where relevant to the scheme.
- They have set specific climate-related objectives for their investment advisers.
- Where possible under the fund structures, their investment manager reports have now been amended to highlight material climate-related risks and opportunities.
- The regular investment and risk performance reports they receive from their investment advisers identify and assess climate-related risks and opportunities which are relevant to their scheme over the short, medium, and long-term time periods they have agreed for each section.
- They expect their investment advisers to complete a more detailed annual review of climate-related risks and opportunities relevant to their scheme. They also expect to receive similar reports on employer covenant and funding from their covenant adviser and scheme actuary.
- They have had training on climate-related issues, and their advisers have put together a plan for future ongoing training.
- Climate-related issues are now a regular standing item on the trustees’ meeting agenda.
- They had considered, with support from their advisers, whether they need new risk management tools to support management of climate-related risks or whether existing tools could be adjusted to reflect the unique characteristics of these risks.
- They had mapped climate-related risks into existing risk categories, including financial, operational and strategic risks, and types. They had also integrated climate-related risk into their:
- IRM monitoring framework and dashboard
- risk register
- The management of risks, including climate-related risks, is also now a regular standing item on the trustees’ meeting agenda. This enables them, with support from their advisers, to consider whether additional actions to reduce risk need to be taken.
They also:
- asked their investment adviser to provide specific advice on:
- the climate risk exposures (and opportunities) of the investment arrangements that they have implemented within each scheme section, over the short, medium, and long-term time periods they have agreed
- whether the long-term time horizons they selected for each section to identify and assess risks are long enough to take account of the timescale over which climate-related risks need to be considered
- how they expect the scheme’s investment strategy and implementation arrangements to develop in the future
- the materiality of data and analytical gaps relating to climate risk in their current investment arrangements, and how they might develop a prioritised programme of engagement to address those-gaps
- had discussions with their employer with regard to their transition plans and agreed on a programme of periodic progress updates
- arranged for several of the scheme’s investment managers to provide periodic industry sector updates about climate-related risks and opportunities for the sectors their employer operates in
- asked their covenant adviser to undertake an assessment of the impact on the employer covenant of climate-related risks and opportunities and monitor this as part of their regular reporting
- had developed, with support from their advisers, a climate risk and opportunity dashboard at an asset class level, which is relevant to the nature of their current scheme arrangements and how they are expected to develop
Next steps
The trustees agree to monitor their risk management processes on an ongoing basis, complete a formal review on an annual basis, and make changes where appropriate.
Meeting the requirements on metrics
The trustees understand that they must select a minimum of one absolute emissions metric, one emissions intensity metric, a portfolio alignment metric, one additional climate change metric and, as far as they are able, in each scheme year:
- obtain the scope 1, 2 and 3 greenhouse gas emissions of the scheme’s assets – although obtaining scope 3 emissions is not mandatory in the first year of complying with the climate change regulations
- use that data to calculate their selected absolute emissions metric and an emissions intensity metric
- obtain the data to calculate their selected additional climate change metric, and use that data to calculate it
- use the metrics they have calculated to identify and assess the climate-related risks and opportunities which are relevant to their scheme
The trustees also understand they can choose different metrics for different parts of their portfolio. They know they can select an alternative additional climate change metric to those listed in the DWP’s guidance if they explain why.
The trustees select two emissions metrics, portfolio alignment metric, and a range of additional climate change metrics. This is a result of having reviewed the following issues with their advisers.
- The nature of the investments held and the data limitations.
- The range of metrics available and how they might be applied to different sections within the scheme.
- The extent to which they could aggregate their metrics across fund exposures using internally consistent methodologies.
- The different decarbonisation trajectories they could adopt for their scheme and the types of actions that would need to be taken to meet those trajectories.
- The kinds of additional climate change metrics that would be most useful for them to consider for each section of the scheme, given the nature of the investments held and the current data limitations.
- The limitations of each of the available metrics, including consideration of:
- the potential for errors in any modelling which is used to fill gaps in reported data
- the range of uncertainty in individual additional climate change metrics
- the potential impact on outputs of data availability and comparability between data inputs
The trustees currently have material investment exposure to:
- sovereign bonds, liability-driven investment (LDI) funds and a wide range of derivative strategies
- investments in certain pooled funds and collective investment vehicles – such as LLPs and funds in some overseas jurisdictions – where the reported look-through in relation to the underlying investment holdings is currently very limited
- an insurance buy-in policy, they also expect their exposure to buy-in policies to increase in the medium term as they intend to undertake further buy-in transactions
The trustees know there are some challenges in analysing the emissions metrics for certain investments, including some sovereign bonds, some forms of derivatives, LDI portfolios and certain pooled funds and collective investment schemes (such as LLPs and funds in some overseas jurisdictions). As part of their strategic allocation to private markets, they also have material holdings in alternative assets, including asset-backed securities, where the availability of climate-related data is currently limited. The trustees understand that they are:
- expected to collect the data and calculate the metrics as far as they are able
- allowed to take an approach that is proportionate to the time and cost required to obtain relevant data
- expected to take a proportionate approach in managing climate-related risks and opportunities in the context of the scheme’s other risks
The trustees want to understand how far current limitations in data and analysis will affect their ability to assess climate-related risks for the affected parts of their portfolio. They also want to understand how material the impact of those limitations might be. With this information, they can take an informed view and prioritise resources.
They ask their investment adviser to prepare a report setting out their high-level assessment, including:
- the scale and nature of the individual exposures, showing:
- sovereign bonds by country, type, and term
- derivatives by type and nature and with short and long positions identified separately
- the separate identification of sustainable investments
- identification of net-zero targets set by sovereigns whose bonds are held and by corporates that they have material exposures to
- the calculation limitations that apply to individual portfolio holdings and their impacts
- identification of any asset or sub-asset classes for which methodologies to attribute greenhouse gas emissions have not yet been developed, for example, interest rate swap derivatives
- the extent to which their buy-in provider discloses emissions data relating to their UK business and, in particular, their UK pension bulk annuity book
- the potential for industry analytical practices to develop in the short term
- the potential for third-party providers to support with input and analysis to complete aspects of the analysis
- alternative or approximate approaches they could take to estimate the exposures, for example:
- where available data is limited, using estimated or proxy data to identify carbon-intensive hotspots in their investment arrangements
- modelling or estimation techniques to fill in missing data gaps, where they have most of the data for particular asset classes
- qualitative rather than quantitative techniques for certain asset classes for which data or modelling tools are limited or uncertain
- alternative sources of information they might use to inform the level of risk underlying individual holdings or mandates
The trustees discuss the report with their adviser. They understand that:
- they have significant exposure to a wide range of sovereign issuers in the DB sections and limited sovereign exposure in the DC section
- their main sovereign positions are held with the UK and US, with material holdings in some other sovereign jurisdictions
- they hold extensive interest rate and inflation rate swap positions as part of their LDI fund
- they have limited exposure to other short positions, mainly through pooled fund strategies
They ask their adviser to calculate for each section of the scheme and as far as they are able:
- two emissions-based metrics, including:
- an absolute emissions metric, based on total greenhouse gas emissions
- an emissions intensity metric, based on carbon footprint
- a portfolio alignment metric, based on limiting temperature increase to 1.5 degrees
- a range of additional alternative climate change metrics, which they believe will provide insight and help them develop their approach and improve their management of climate-related issues
The trustees also ask their adviser to:
- advise on the extent of the risks and opportunities the metrics have identified which are relevant to the scheme
- document how they believe that:
- they have met the ‘as far as they are able’ requirements in relation to data collection and calculation of the metrics
- their analysis has been limited and how they might be able to improve it in the future
- highlight any aspects of the portfolio that should be prioritised for engagement to:
- improve the data and/or
- develop calculation methodologies
- in order to improve their ability to assess and analyse the underlying climate-related risks
The trustees hold a significant amount of sovereign bonds, with around 60% in UK government bonds and the rest invested across a range of sovereigns.
They agree to use the Climate Change Performance Index as an additional climate change metric. They use this as a benchmark to identify the climate performance of individual sovereigns and identify material exposures to sovereigns with medium to very low ratings. They then discuss with their advisers whether they should:
- make any changes to investment holdings
- prioritise engagement with some investment managers
- adjust investment mandate limits (where possible)
- use other sovereign investments to perform the same investment or risk management role that their current sovereign investments perform as part of the overall investment strategy for the scheme
Reviewing the metric selections
The trustees know they need to review their metric selections from time to time, as appropriate to the scheme, and that climate data, analytical techniques and industry practices are rapidly evolving.
They agree that they will review them annually and take appropriate advice as to whether they should retain their existing metrics or select some new ones. They also agree they should particularly consider selecting new metrics following any material:
- changes in the investment strategy, as some metrics may be more appropriate to different investment portfolios
- risk transfer transactions
- changes in their existing climate-related objectives or the setting of new climate-related objectives
- improvements in the quality and coverage of climate-related data available to the trustees, which may facilitate alternative analysis
- improvements in the quality, coverage and capability of market metrics or the development of more appropriate forms of those metrics
- relevant legal or regulatory changes
Next steps
The trustees review and discuss possible changes to the investment strategy and implementation arrangements with their advisers. They discuss how they might improve climate-related data and analysis in subsequent scheme years. They also discuss, agree, and prioritise a programme of engagement with their investment managers to improve the level and quality of climate-related data. They agree that they should consider the availability of climate-related data and metrics during any investment manager or insurer buy-in transaction selection exercises.
Meeting the requirements on targets
The trustees understand that they must:
- set a target for the scheme in relation to at least one of the metrics they calculated
- in each scheme year:
- measure, as far as they are able, the performance of the scheme against that target
- consider whether the target should be retained or replaced
The trustees also understand that the targets set:
- are not legally binding
- should not conflict with their fiduciary duties or their investment policies as set out in their Statement of Investment Principles
The trustees and their advisers discuss how they expect the scheme’s investment arrangements in each of the individual DB and DC sections to develop in the short term. They consider the potential effect of those developments on the choice of targets in individual sections.
Before they carried out climate-related analysis on their scheme, the trustees had the following expectations.
- For their very mature DB section, they would enter into more insurer buy-in transactions in the short to medium term. They would also realign the scheme assets to better reflect the type of portfolio an insurer might hold, given the ambition to fully buy in the liabilities for that section over the medium term.
- For the immature DB section, they would increase their allocation to alternative and private market investments to 30% from their current portfolio holding of around 10%. This would be subject to the availability of suitable assets for the scheme which would meet the expected net return, expected risk, expected time horizon and portfolio concentration limits.
- For the DC section, they would look for opportunities to increase their exposures to illiquid assets, given market developments and the potential for those opportunities to improve member outcomes. They would also carry out a survey of members before their next investment strategy review. This would identify any specific member needs or requirements.
More generally, the trustees understood that the regulatory requirements to disclose climate-related information should significantly improve the availability of climate-related data across different scheme sections over the next year.
Taking all of this into account, the trustees ask their investment advisers to recommend which metrics they believe would be appropriate to consider using as the basis for a suitable target for each section, given any intended investment changes and the expected improvements in data coverage. They also ask their adviser to set out the reasons why they believe those individual targets might be suitable.
The trustees discuss the report with their advisers and agree to set targets relating to the following metrics.
- For the very mature DB section, they agree to set a target related to emissions intensity and use carbon footprint as their metric. This reflects their expectation that, for future buy-in transactions, insurers will consider the extent to which investments being offered by the trustees in settlement of the transaction are climate-aligned.
- For the immature DB section, they agree to set a target related to one of their selected additional climate change metrics, which is based on improvements in the quality and quantity of climate-related data coverage. They are aware that their current climate-related data coverage is limited given the complexity of the current investment arrangements.
- For the DC section, they agree to set a target related to another additional climate change metric, based on portfolio alignment, as they believe that metric is likely to be more easily interpreted by members.
The trustees ask their investment adviser to recommend:
- the appropriate levels at which to set the individual targets
- the time horizons over which they should set the targets
- the interim targets they believe would be appropriate to adopt
They also ask them to set out how much, if at all, any limitations in the trustees’ ability to obtain data and calculate metrics have affected the choice of metric and the level of the target set.
They set the current scheme year as their reference base year for assessing progress against their targets and agree on how they will measure the performance of the scheme against those targets.
The trustees have already agreed to set a net-zero target of 2050 for their scheme. They have an ambition to accelerate that target as they gain more experience of climate-related issues and of the implications and path dependencies of implementing a net-zero portfolio earlier than that date. The trustees agree that:
- any targets set are not legally binding, and they should not conflict with their fiduciary duties, or the investment policies stated in the Statement of Investment Principles
- once they have fully developed their net-zero alignment plan, they will consider how they can align any future targets set for individual scheme sections with that plan
- they will measure on an annual basis, as far as they are able, the performance of the scheme against any targets
- on an annual basis, they will review and take the appropriate advice on whether the target should be retained, replaced or potentially accelerated, taking into account the performance against that target
Next steps
The trustees embed the targets in their scheme governance, strategy, risk management processes and their contracts with investment service providers. They set out in their internal processes that the targets are not legally binding and should not conflict with the trustees’ fiduciaries duties or their investment policy objectives.
Documenting their approach
The trustees understand that some of the activities required by the climate change regulations are:
- subject to an 'as far as they are able' requirement
- expected to be based on taking reasonable and proportionate steps, which take into account the expected likely costs and time required
The trustees also understand that they are expected to take a proportionate approach in managing climate-related risks and opportunities in the context of the scheme’s other risks.
The trustees agree that, together with their advisers, they should document:
- a clear explanation of what they have been able to do, what they have not been able to do and why
- some analysis by asset class setting out their current climate-related data coverage and how they expect that coverage to develop in future years
- the extent to which they can reasonably approximate any current gaps in the climate-related data
- any intended changes in the scheme’s investment strategy or implementation arrangements that affected the data collection or data analysis they completed. For example, deciding not to collect data and carry out analysis on an investment in a fund which the trustees were already in the process of divesting from
They document why they believe their adopted approach met the requirements of ‘as far as they are able’ and was reasonable and proportionate. The trustees also complete a lessons-learned exercise with their advisers to improve their processes the following year for:
- collecting data
- carrying out analysis
- reviewing the output
- preparing their TCFD report
Completing and publishing the report
The trustees are now satisfied that their scheme’s governance framework meets the requirements of the climate change regulations.
As they prepare their climate change (or TCFD) report, the trustees are careful to both meet the requirements of the climate change regulations and have regard to the DWP’s statutory guidance.
They publish their report and notify their members in accordance with legal requirements, as referenced in section 4 of DWP’s statutory guidance.
Appendix 2: when schemes are subject to the requirements
Use this page to discover when your scheme is subject to the requirements of The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 and The Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021.
You will need to consider the following two tests:
- The 'relevant assets’ test
- The ’authorised schemes’ test
The relevant assets test
Trustees must meet the governance and reporting requirements of the regulations in relation to their pension scheme if the scheme has ‘relevant assets’ of at least a certain amount at the end of a scheme year that ends on or after 1 March 2020.
The definition of relevant assets
According to The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021:
- 'relevant assets' means:
- in the case of a scheme in respect of which the trustees are required to obtain audited accounts, the total of the amount of the net assets of the scheme recorded in the audited accounts for the scheme year less the value of the assets of the scheme represented by any relevant contract of insurance recorded in those accounts
- in the case of a scheme which is an ear-marked scheme, the value of the assets of the scheme represented by any policies of insurance or annuity contracts that are specifically allocated to the provision of benefits for individual members or any other person who has a right to benefits under the scheme, less the value of the assets of the scheme represented by any relevant contract of insurance
- 'relevant contract of insurance' means a contract of insurance entered into by the trustees of the scheme with an insurance company regulated in the United Kingdom by the Prudential Regulation Authority where:
- the contract is an annuity contract which has secured the provision of a pension in payment to or in respect of a scheme member and, at all times before coming into payment, that pension was a benefit falling within section 181B(2) of the Pension Schemes Act 1993; or
- the contract provides for payments to be made by the insurance company which are intended, irrespective of future financial market conditions or scheme member longevity, to meet the cost of benefits specified in the contract
- which are not money purchase benefits under section 181(1) of the Pension Schemes Act 1993; and
- which are or will become payable to or in respect of a scheme member
The requirements apply where a scheme has relevant assets of:
£5bn or more at the end of their first scheme year ending on or after 1 March 2020
-
Meet the governance requirements:
- from 1 October 2021, or (if later and the scheme is not an ear-marked scheme) from the date on which the trustees obtain audited accounts for that scheme year, to the next scheme year-end; and
- subject to (c) below, during every subsequent scheme year
-
Meet the reporting requirements:
- within seven months of the end of the first scheme year in which the trustees had to comply with the governance requirements; and
- subject to (c) below, within seven months of every subsequent scheme year-end
-
If your scheme's relevant assets fall below £500m on any subsequent scheme year-end date:
- you will cease to be subject to the governance requirements from that date
- you must still publish a TCFD report for the scheme year which has just ended (within seven months of the scheme year-end date) unless one of the exceptions in regulation 6(2) of the regulations apply
£1bn or more at the end of their first scheme year ending on or after 1 March 2021
-
Meet the governance requirements:
- from 1 October 2022 or (if later and the scheme is not an ear-marked scheme ) from the date on which the trustees obtain audited accounts for that scheme year, to the next scheme year-end; and
- subject to (c) below, during every subsequent scheme year
-
Meet the reporting requirements:
- within seven months of the end of the first scheme year in which the trustees had to comply with the governance requirements; and
- subject to (c) below, within seven months of every subsequent scheme year-end
-
If your scheme's relevant assets fall below £500m on any subsequent scheme year-end date:
- you will cease to be subject to the governance requirements from that date
- you must still publish a TCFD report for the scheme year which has just ended (within seven months of the scheme year-end date) unless one of the exceptions in regulation 6(2) of the regulations apply
£1bn or more at the end of their first scheme year ending on or after 1 March 2022
-
Meet the governance requirements:
- from the beginning of the scheme year which is one scheme year and a day after that scheme year-end date, to the end of that scheme year; and
- subject to (c) below, during every subsequent scheme year
-
Meet the reporting requirements:
- within seven months of the end of the first scheme year in which the trustees had to comply with the governance requirements; and
- subject to (c) below, within seven months of every subsequent scheme year-end
-
If your scheme's relevant assets fall below £500m on any subsequent scheme year-end date:
- you will cease to be subject to the governance requirements from that date
- you must still publish a TCFD report for the scheme year which has just ended (within seven months of the scheme year-end date) unless one of the exceptions in regulation 6(2) of the regulations apply
The authorised schemes test
Trustees must also meet the governance and reporting requirements if their pension scheme is an authorised master trust or an authorised collective money purchase scheme.
From 1 October 2021 or if later, the date the trust or scheme becomes authorised
-
Meet the governance requirements:
- from that date until the next scheme year end; and
- subject to (c) below, during every subsequent scheme year
-
Meet the reporting requirements:
- within seven months of the end of the first scheme year in which they had to comply with the governance requirements; and
- subject to (c) below, within seven months of the end of every subsequent scheme year
-
If your scheme subsequently ceases to be an authorised master trust or authorised collective money purchase scheme, the reporting requirements may cease to apply:
- If the relevant assets of the scheme were less than £500 million on the scheme year-end date immediately preceding the scheme year in which authorisation ceased, the requirements for governance and reporting will immediately cease.
- Otherwise, the requirements will continue to apply unless your scheme’s relevant assets fall below £500 million on a subsequent scheme year-end date, in which case:
- you will cease to be subject to the governance requirements from that date
- you must still publish a TCFD report for the scheme year which has just ended (within seven months of the scheme year-end date) unless one of the exceptions in regulation 6(2) of the regulations apply