Consider the possible short, medium and long-term effects of climate change on the objectives of the scheme and its operations
Maintain and document processes for identifying and assessing climate-related risks and opportunities
Integrate these processes into their risk management and governance arrangements
Ensure the governing body oversees, assesses and manages climate-related risks and opportunities related to the scheme
TPR says other schemes may choose to consider these expectations as best practice. This means all schemes are effectively required to assess and report on risk related to increasing global temperatures.
Large schemes are already required to consider their exposure to climate risk in detail, in order to comply with standards set out by the Taskforce on Climate-related Financial Disclosures (TCFD). UK schemes with assets under management of £1 billion or more have been required to comply with TCFD since October 2022.
Many smaller schemes will only just be getting started on climate risk, and for trustees the task may seem daunting. But you can make progress by taking basic early steps and building from there.
Regulations reflect wider climate change risks
For many schemes, TPR’s requirements will be the trigger to begin taking climate risk seriously. Failing to do so means breaching the code.
The inclusion of climate change in the General Code highlights existing risks that pension schemes should already be considering. These include:
- Fines for schemes with assets under management of £1 billion or more. The government is considering which additional schemes should be covered by TCFD requirements in future.
- Reputational risk for companies with ambitious climate policies if their pension schemes aren’t aligned with corporate values.
- Financial risk — if your scheme is heavily invested in, for example, potentially stranded assets or fails to invest in businesses that will gain from the climate transition, your members could lose out. Do you offer a sustainable fund in your default strategy?
- Lack of member engagement — environmental issues are increasingly important to scheme members. This provides an opportunity to raise members’ interest in their pensions — and risks member discontent if expectations aren’t met.
How to get started on addressing climate change risk
If you are only just beginning to consider the implications of climate change for your scheme, you are not alone. Mercer’s RITE (Responsible Investment Total Evaluation) assessment shows schemes making progress on integrating sustainable investment but more than half of schemes scoring C+ or lower on a scale of A++ to C.
Trustees often tell us they feel overwhelmed by the volume of requirements they face, and this is particularly true of smaller schemes. But it’s not difficult to put the building blocks in place. Here are five early steps you can take as trustees to comply with the new requirements:
Sign up for training to make sure you understand the code’s requirements and how they apply to your scheme.
Update your risk register and review documents to show that you have given proper consideration to climate risk.
Establish sustainable investment beliefs to guide you along the pathway to compliance.
Review whether your scheme offers a sustainable fund in its default strategy.
Work with your sponsor to make sure your strategy is aligned with corporate climate goals.
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