60: New regulations on climate change governance and reporting requirements for trustees

A new governance and reporting framework for trustees in relation to the risks associated with climate change will be introduced in October 2021 by two sets of regulations. The requirements will apply to trustees of large occupational pension schemes.

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 are due to come into effect on 1 October 2021.

The regulations introduce new reporting requirements for trustees of pension schemes to improve the quality of governance and the level of action required from trustees in identifying, assessing and managing climate risk. The new requirements follow the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).

The Department for Work and Pensions has also published guidance on trustees’ obligations under the Regulations.

Which schemes do the new obligations apply to?

From 1 October 2021, the new requirements apply to pension schemes with assets of £5 billion or more, authorised master trusts and authorised collective money purchase schemes (this is referred to in DWP’s guidance as the ‘first wave’).

From 1 October 2022, pension schemes with assets of £1 billion or more will also have to comply (the ‘second wave’).

The requirements will cease to apply if a scheme’s assets subsequently drops to below £500 million (unless the scheme is an authorised master trust or authorised collective money purchase scheme).

What are the new requirements?

This is a summary of the main new requirements:

Governance – trustees will be required to establish and maintain oversight of relevant climate-related risks and opportunities. This includes a requirement for trustees to put in place processes to ensure that any person who undertakes governance activities in relation to the scheme or is an adviser to the trustees (other than a legal adviser) takes adequate steps to identify, assess and manage relevant climate-related risks and opportunities;
Strategy – trustees are required to identify and assess, on an ongoing basis, climate-related risks and opportunities which they consider will have an effect over the short term, medium term and long term on the scheme’s investment strategy (and where relevant the funding strategy);
Scenario analysis – trustees are required, as far as they are able, to undertake scenario analysis which considers the impact on the scheme’s assets and liabilities and the resilience of the scheme’s investment strategy (and where relevant the funding strategy) in at least two scenarios where there is an increase in the global average temperature. In one of those scenarios, the global average temperature increase must be between 1.5 and 2 degrees Celsius above pre-industrial levels;
Risk management – trustees are required to establish and maintain processes to identify, assess and manage relevant climate-related risks;
Metrics and targets – trustees are required to select a minimum of three metrics to calculate the scheme’s assets: one which gives the total greenhouse gas emissions of the scheme’s assets (absolute emissions metric); one which gives the total carbon dioxide emissions per unit of currency invested by the scheme (emissions intensity metric); and one other metric relating to climate change (additional climate change metric). Trustees must set a target for their scheme in relation to at least one of the above metrics;
TCFD report – trustees must publish a TCFD report within seven months of the end of any scheme year in which they were subject to the climate change governance requirements. The report must be published on a publicly available website and be accessible free of charge. There are also new disclosure and notification requirements in relation to information about the TCFD report; and
Trustee knowledge and understanding – the identification, assessment and management of risks arising from the effects of climate change is a new area of which trustees are required to have knowledge and understanding.