Important
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
Develop a climate risk and opportunity dashboard to include in your regular reporting cycle.
If you have a funding strategy, include a section in the dashboard on funding and covenant.
Make sure your service providers and advisers report on climate-related risks and opportunities
Set objectives that require them to report on climate-related risks and opportunities. Obtain regular updates that identify and assess these risks and opportunities, alongside your investment and risk performance reports. The updates will be most useful for decision-making where they are aligned with your scheme’s short, medium and long-term time horizons.
Obtain specific advice on climate risk exposures and opportunities
Seek specialist advice on the climate-related risks and opportunities for your investment arrangements over different time horizons and review this advice regularly.
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 arising from climate change when considering scheme funding, the employer covenant and any contingent support and 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 covenant and develop a process for the employer to alert you to emerging climate-related risks. You could consider aligning your approach to climate change with your sponsor’s.
Example: processes to identify and assess climate-related risks
The trustees of the GHI 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 scheme’s investment advisers so they include requirements to advise on climate-related risks and includes climate risk in ongoing scheme monitoring reports
- 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
The ISC also:
- asks their investment adviser to produce a 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
- 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
- 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 describe:
- the risk management tools you have used and the 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 of risks
- whether and how any stewardship activities have helped you manage climate-related risks