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Risk management

Sections of this guidance

Important

Read paragraphs 95 to 116 of part 3 of the DWP’s statutory guidance for more on how to include climate-related risks in your risk management processes.

For a further explanation of how climate-related risks and opportunities can affect pension schemes, read paragraphs 26 to 32 of part 1 of the DWP’s statutory guidance.

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

Take advice on the climate-related risks and opportunities that might affect your scheme over different time horizons, covering its investments (and for DB schemes, employer covenant and liabilities). Your existing advisers may be able to offer this service. You may also need to consider input from specialist advisers.

Free online resources such as the Sustainability Accounting Standards Board (SASB) climate risk map can help you form an initial view of the types of risks and opportunities that might be relevant and help guide your discussions with advisers.

Develop a dashboard

Consider developing a climate risk and opportunity dashboard to include in your regular reporting cycle.

If you have a DB scheme funding strategy, include a section in the dashboard on funding and covenant.

To see an example of the layout and what metrics you could include, download our climate risk and opportunity dashboard template (DOC, 164kb, 8 pages).

Make sure your relevant service providers and advisers report on climate-related risks and opportunities

Decide which service providers should be responsible for alerting you to emerging climate-related risks and opportunities (such as new government policies that could affect the profitability of certain sectors). Obtain regular updates alongside your regular investment and covenant monitoring reports. The updates will help your decision-making most when they are aligned with your scheme’s short, medium and long-term time horizons.

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 and opportunities arising from climate change when considering scheme funding, the employer covenant and any contingent support. 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 employer and develop a process them to alert you to emerging risks, including climate-related risks. You could consider aligning your approach to climate change with your sponsor’s.

Example: processes to identify, assess and manage climate-related risks

The trustees of the GH 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 the scheme’s investment advisers, so they include requirements to advise on climate-related risks and include climate risk in ongoing scheme monitoring reports and climate-related stewardship activities
  • 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
    • engagement, voting and stewardship activities in relation to climate-related matters

The ISC, with support from the scheme’s advisers where appropriate, also:

  • asks their investment adviser to 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
    • the rating of each of their current investment managers’ mandates in relation to climate-related capabilities, risks and opportunities and of their investment managers more generally in relation to climate-related matters
    • the rating of each of their current investment managers and mandates held in relation to climate-related engagement, voting and stewardship activities
  • agrees to review with their advisers the appropriateness of retaining or amending any existing investment manager mandates where the rating was considered to be poor
  • 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 and the materiality of those risks in line with the short, medium and long-term horizons for their scheme
    • the relationship between climate-related risks and other scheme risks
  • 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

Important

Read paragraphs 112 to 116 of part 3 of the DWP’s statutory guidance for what you must describe in your report. A summary is set out below.

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 concisely describe:

  • the risk tools you have used and the outputs and 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 and management of risks

You may also include information on how your stewardship approach has been used, if at all, to help you manage climate-related risks.