UK to require pension trustees to report on climate change commitments

DWP has launched a consultation on the requirement to align investments with the Paris Agreement. The consultation also seeks views on draft guidance on the Statement of Investment Principles (SIP) and the Implementation Statement, with a particular emphasis on stewardship.

DWP said the proposals would help inform trustees’ investment decisions, stewardship and voting, and reflected industry calls for methodological flexibility.

The consultation proposes the introduction of a portfolio alignment metric. The metric will add to reporting requirements aligned with the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations, which came into force for the largest occupational schemes and authorised master trusts on 1 October 2021.

Trustees will be able to choose the portfolio alignment tool which reflects their scheme’s specific circumstances. They will have to provide data “as far as they are able”, but not make disproportionate payments or efforts to obtain data from asset managers.

All trustees in scope would have to comply with the new regulation from 1 October 2022. The requirement would apply to trustees of all authorised master trusts and authorised collective defined contribution schemes, as well as trustees of schemes with relevant assets in excess of £1 billion, or exceeding £5 billion in their first scheme year.

Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law, said: “This consultation is further evidence of the leading role that pension trustees are expected to play in tackling climate change.

“The proposals for measuring and reporting on portfolio alignment follow the pattern set by the recent legislation on TCFD reporting, of ‘action not perfection’ – requiring compliance whilst recognising that there are limits to what trustees will be able to achieve because of data and methodology issues. The relative simplicity of portfolio alignment metrics have the ability to transform member understanding of a scheme’s exposure to climate risk, so further increasing the scrutiny of trustees in this area and the imperative for sound governance,” Saunders said.

In the area of stewardship, the DWP set out proposals for guidance on the approach which should be taken to SIPs and implementation statements. The guidance will encourage trustees to identify what their scheme’s stewardship priorities are, and set out their own stewardship policy or that of their managers’.

The draft guidance also includes policies to help trustees vote, and how their voting is recorded in the implementation statement.

“The stewardship proposals, following so hot on the heels of the report from the Taskforce on Pension Scheme Voting Implementation, shine a spotlight on an area that many trustee boards are yet to get to grips with. The evidence that stewardship can significantly enhance investment returns, reinforces the link to the trustees’ fiduciary duty – hence the specific proposals around expecting trustees to consider and explain how their stewardship policies are in members’ best interests,” Saunders said.