Important
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 sub-committee (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.
Outline the structure for making climate-related decisions in your report, showing where responsibility lies for decision-making. It may also be helpful to set out how this work is integrated into your plans, monitoring framework and meeting cycle.
The outline might include the role of those undertaking or advising on governance activities, such as executive officers or in-house teams, and how such roles are overseen.
Example: establishing oversight
The trustees of the ABC 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 the important climate issues and 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. They update their terms of reference to make this explicit.
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 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 the running of 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 to propose the next steps. They add climate change as a standard and regular agenda item at the main trustee board meeting.
Build climate change into your service provider and adviser contracts
Review whether your service providers and advisers have the skills and resources to address climate-related risks and opportunities and provide appropriate levels of data 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.
Example: the climate competency of service providers and advisers
The DEF 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
The trustees want to reflect the requirement to provide advice and assistance in relation to climate-related matters. Therefore, following the review, they make adjustments to:
- their investment adviser’s service agreement
- their investment adviser’s objectives against which they monitor their performance
The trustees then conduct a similar exercise with their scheme actuary and covenant adviser.
Resource
The Investment Consultants Sustainability Working Group has published a guide setting out five themes against which trustees should expect their Investment Consultants to demonstrate their climate competency, they are:
- 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
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 climate-related 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 you provided for your existing employees about climate-related risks and opportunities. If you identify skills gaps, you may also describe whether you encouraged external advisers to provide training opportunities