Important
Example steps to take
Taking the following actions may help you meet the requirements to consider climate-related risks and opportunities in your investment strategy – and funding strategy, in the case of a defined benefit (DB) scheme – and 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.
| 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 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 scheme’s duration
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 ten years given the importance of significant changes being made in the next decade to limit global warming to 1.5 degrees Celsius
- long term as 25 years in line with the scheme’s duration
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 which means 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 given expected changes in climate change data quality and climate regulations
- medium term as ten years given the importance of significant changes being made by 2030 to limit global warming to 1.5 degrees Celsius
- long term as 30 years in line with a target of net-zero around 2050
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 may 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 change on your scheme, you may wish to bring the next 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 climate risk 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 climate risks 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 potential impact on your scheme’s assets, liabilities and the resilience of your investment strategy (and for DB schemes, funding strategy) against two scenarios.
- An increase in global average temperatures.
- A global average temperature rise of between 1.5 and 2.0 degrees Celsius above pre-industrial levels.
Consider the following factors in your assessment.
- The nature of the transition to the temperature.
- What steps you might take in light of that.
- The potential impacts that might arise in the different time periods you identified for your scheme.
- The potential impact on specific asset classes and individual material holdings.
- For DB schemes in particular - the potential impact on different tranches of liabilities or liabilities with different characteristics on the employer’s covenant (as part of considering the funding strategy).
- The impact of adjustments to the strategy following on from the assessments.
Decide when to carry out further analysis
Conduct scenario analysis in the first scheme year and every third scheme year thereafter.
Review your most recent scenario analysis each year and consider if it needs to be updated, for example, following any material change to the investment strategy, scheme liabilities or following a material improvement in the quality or availability of data. If you do so, re-set your timescale to conduct fresh analysis three years thereafter.
If you decide not to conduct a new scenario analysis outside the mandatory cycle, you must explain the reasons why in your climate change report.
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 that will affect your scheme’s investment strategy (and in the case of a DB scheme, your funding strategy) 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)
- details of the most recent scenarios you have used in your analysis
- the potential impacts in those scenarios on assets and liabilities – and if gaps in data have stopped you from identifying 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 a 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 any limitations of the modelling
- any issues with the data or its analysis which have limited your assessment
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.