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Climate change

Code in force: 28 March 2024

This module forms part of our expectations for trustees of those schemes required to operate an effective system of governance, see Systems of governance.

  1. All pension schemes face some degree of material risk from climate change. These risks may include the physical effects of climate change such as:
    1. rising temperatures
    2. higher sea levels
    3. droughts
    4. floods
    5. storms
  2. They may also include the impact of changes associated with the transition to a low-carbon economy, such as:
    1. impacts on the strength of any sponsoring employer
    2. new climate policy
    3. disruptive technology
    4. shifting investor sentiment
    5. deteriorating reputation

Climate change and investments

  1. Under section 249A of the Pensions Act 20041, governing bodies of certain schemes must establish and operate an effective system of governance (see Systems of governance) including internal controls (see Internal controls). However, there are certain exemptions2. The system of governance must be proportionate to the size, nature, scale, and complexity of the activities of the scheme.
  2. An effective system of governance should ensure that consideration of environmental factors is part of the governing body’s investment decision-making (see Stewardship).
  3. Governing bodies should:
    1. talk to their advisers and asset managers about how short and long-term climate change risks and opportunities are built into their recommendations
    2. understand what measures are being taken to reflect climate change risk within investment portfolios

Governing bodies of certain schemes3 are required to include policies in their statement of investment principles relating to environmental, social and governance considerations (see Stewardship) that they consider financially material. This includes climate change.

  1. Governing bodies are not currently required to align their investment and funding plans with the objectives of the Paris Agreement and other climate change goals, such as the UK’s own target of net zero emissions by 2050. However, they may wish to examine how their governance practices and investment decision-making (where applicable) take into account global progress towards those goals.

Managing scheme risks from climate change

  1. Governing bodies that are required to establish and operate adequate internal controls4 for their scheme should, as part of their risk assessment, assess the risks and opportunities associated with climate change. See Identifying, evaluating, and recording risks.
  2. Our expectations for governing bodies required to operate an effective system of governance are set out in paragraph 9 below. Other governing bodies may wish to consider these as good practice.
  3. Governing bodies should:
    1. consider the possible short, medium, and long-term effects of climate change on the scheme’s objectives and its operations
    2. maintain and document processes for identifying and assessing climate-related risks and opportunities
    3. integrate these processes into their risk management and governance arrangements
    4. ensure they oversee, assess, and manage climate-related risks and opportunities relating to the scheme

Climate-related governance and disclosures

  1. Governing bodies of certain schemes must meet the governance and reporting requirements set out in regulations under the Pension Schemes Act 20215, relating to climate-related risks and opportunities. For schemes in scope, governing bodies must take steps to identify, assess and manage climate-related risks and opportunities and report6 on what they have done. These reporting requirements align with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

Governing bodies subject to these requirements must have regard to statutory guidance issued by the Department for Work and Pensions (DWP).

We have also developed guidance, which sits alongside the statutory guidance produced by the DWP.

Paris Agreement

A legally binding international treaty on climate change, adopted in Paris on 12 December 2015.

Taskforce on Climate-related Financial Disclosures (TCFD)

The TCFD is an international taskforce that seeks to develop recommendations for consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information.

1 Article 226A of The Pensions (Northern Ireland) Order 2005

Section 249A(3) of the Pensions Act 2004 [Article 226A (3) of The Pensions (Northern Ireland) Order 2005]

3 Regulation 2 of the Occupational Pensions Schemes (Investment) Regulations 2005 [Regulation 2 of the Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

Sections 249A and 249B of the Pensions Act 2004 [Articles 226A and 226B of the Pensions (Northern Ireland) Order 2005]

Regulations 3 to 6 and the Schedule to The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 [Regulations 3 to 6 and Part 1 of the schedule to The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations (Northern Ireland) 2021]

6 Regulation 6 and the Schedule to 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 [Regulation 6 and Part 2 of the Schedule to The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations (Northern Ireland) 2021, and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations (Northern Ireland) 2021]