22 June 2022 Pensions - ESG

UK Pensions – Enhanced climate change reporting requirements from 1 October

From 1 October, trustees of larger occupational pension schemes and authorised master trusts will be required to measure and report on an additional climate change metric as part of their Task Force on Climate-related Financial Disclosures (TCFD) governance and disclosure obligations. The new metric will measure the extent to which schemes’ investments are aligned with the Paris Agreement goal of pursuing efforts to limit the global average temperature increase to 1.5°C above pre-industrial levels.

This follows a consultation published in October last year (see our earlier client alert). Only limited changes have been made to the proposals following the consultation.

The requirement will apply to all schemes in scope from 1 October 2022. It will therefore apply immediately to schemes with £1 billion or more in assets when the climate change requirements first apply to them from 1 October (as well as applying to schemes with £5 billion or more in assets and authorised master trusts from that date). Trustees now need to get up to speed quickly with these new requirements, as well as watching this space for further developments in this rapidly evolving area.

Measuring and reporting Paris alignment

Under the current requirements, trustees in scope are required to calculate and disclose three metrics: one which gives the total greenhouse gas emissions of the scheme’s assets (an “absolute emissions metric”), one which gives the total greenhouse gas emissions of the scheme’s assets per unit of currency (an “emissions intensity metric”) and one other which relates to climate change (an “additional climate change metric”). Trustees will now be required to calculate and disclose a fourth metric, which gives the alignment of the scheme’s assets with the climate change goal of limiting the increase in the global average temperature to 1.5°C above pre-industrial levels (a “portfolio alignment metric”).

Several points are worth highlighting:

  • The Government has published amended statutory guidance, which includes much of the detail underpinning the climate change requirements and to which trustees must have regard. The amended guidance covers the types of portfolio alignment metrics trustees should calculate and report.
  • As with the existing metrics requirements, trustees must calculate the portfolio alignment metric “as far as they are able”. This recognises that there may be gaps in the data trustees are able to obtain for these purposes. The amended statutory guidance includes information on the management and reporting of data gaps.
  • Trustees already in scope may choose a portfolio alignment metric as their additional climate change metric for the period before the new requirements come into force (if they have not already done so). However, once the new requirements are in force, trustees will need to select a different additional climate change metric to remain compliant. The updated statutory guidance includes an extended list of additional climate change metrics which trustees can choose, bringing the guidance in line with updated TCFD guidance to the extent suitable for pension schemes.
  • The Pensions Regulator is expected to update its guidance on climate change ahead of the new requirements coming into force.

Stewardship

The Government has also issued new guidance on the Statement of Investment Principles (SIP) and the Implementation Statement (IS). The guidance relating to the SIP is non-statutory “best practice” guidance, but the guidance in relation to the IS is statutory guidance to which trustees must have regard. The guidance focuses on the areas where existing policies and reporting are perceived by the Government to be weakest – stewardship (specifically, voting and engagement) and, to a lesser extent, consideration of financially material ESG factors and non-financial factors.

For more information, please speak to your usual Linklaters contact.