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Background

Important

This guidance complements and should be used alongside the DWP’s statutory guidance ‘Governance and reporting of climate change risk: guidance for trustees of occupational schemes’.

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 8 to 16 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 and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 introduce 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 guidance4.

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.

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.

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 several modules that refer 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

We will publish further guidance 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 introduced by the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 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 33-41 (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