UK’s largest pension schemes set for mandatory climate risk reporting

27 August 2020

UK’s largest pension schemes set for mandatory climate risk reporting

It has long been anticipated that the Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations will become mandatory, certainly for certain organisations. The Department for Work and Pensions (“DWP”) has now said that UK pension schemes of a certain size will be mandated to disclose the climate-related risks posed to assets in their portfolios by the end of 2022. Please see edie’s article here.

Under the proposed changes, pension schemes with £5bn or more in assets under management will be required to assess and publicly report on the physical and transition risks facing assets in their portfolios by the end of 2022. Smaller schemes which have more than £1bn in assets under management will have to report by the end of 2023. Failure to comply would result in penalties from the Pensions Regulator, including fines.

The Department’s Secretary of State Therese Coffey formally opened a six-week consultation period on the new climate disclosure rules on the 26 August, however in principle it is expected that the expected disclosures will follow the recommendations of the TCFD, including the requirement to conduct scenario analysis, taking into account a range of different global temperature increases, including a 2 degree or lower scenario.

Whilst there have been calls for the DWP to introduce a blanket requirement for pension schemes to divest from fossil fuels companies or other high-emitters, this has not been included in the current proposals, with the argument that by holding high carbon assets, trustees can nudge or cajole or vote firms to lower-carbon business practices, whereas selling these assets to those without the same environmental concerns would be counter-productive.

In her speech delivered on Wednesday 26 August, Therese Coffey said:

“Pension schemes need to act in their members’ best interests, not take moral stances on their members’ behalf. And while some high-carbon firms will fail to make the transition to a low carbon economy, this is an opportunity to make companies transform their business models to be sustainable. Our reforms will ensure trustees are held more accountable than every before.”

Several moves to divest from fossil fuels are already taking place, however, with the UK’s largest pension scheme in terms of membership (Nest) voluntarily divesting away from any large business that derives at least 15% of its turnover from fossil fuels. Going forward it will be interesting to see whether wider pressures from investors and consumer opinion will add to divestment, in the absence of any regulations.