Blog – Pensions’ climate risk reporting: a sustainable regime?

Expectations have been building for asset owners (particularly pension schemes) to focus more on Environmental, Social and Governance factors (ESG) as part of their investment strategy – and not only from activist groups. Whilst savers increasingly want to know what is being done with their money, the UK Government is now also determined to harness this capital for good.

In August, the Department for Work and Pensions (DWP) opened a consultation on pension schemes’ governance and climate risk reporting. The proposed rules would require schemes to assess and manage climate risks and opportunities as part of their investment strategy, and to publish a climate change report annually (in line with recommendations by the Taskforce on Climate-related Financial Disclosures (“TCFD”).

Guy Opperman, Minister for Pensions and Financial Inclusion recently joined Hume Brophy for a discussion on the Government’s landmark Pension Schemes Bill and overall direction of travel of sustainable finance in the UK. These new ambitions and rules will certainly bring new challenges pension schemes and organisations supporting them, but also opportunities for the industry, savers, and the UK economy.

UK’s Leadership
The UK is actively promoting climate protection on the international stage. In 2019, following a recommendation by the committee on climate change, the UK announced its intention to become Net Zero by 2050. This recent plan to harness pensions capital is one of many bills designed to help achieve its ambitious strategy to tackle climate change since.

But beyond the critical importance of mitigating climate risk, for political leaders it is also the future role of London that is at stake. These Government-led initiatives in the UK present a stark contrast to the current environment in the USA where the Department of Labour recently proposed a new rule that would require private pension funds to prove they are not sacrificing financial returns if they put money in ESG orientated vehicles.

Keeping a close eye on developments in North America, Europe and Asia, the UK Government sees sustainable finance has a great opportunity to position the UK and London ahead of New York as the global centre for sustainable finance. With this in mind, expect similar regulatory initiatives in the coming months and years.

Implications for the industry
The implication of the pension scheme bill on pension schemes in the UK is clear: they will now be required to consider how climate change will affect investments and publish information relating to the effects of climate change on the scheme.

​However, while focused on trustees, these new rules certainly throw up complex questions for asset managers and other service providers, who will need to adapt their offering and be responsible for providing the underlying data.

Pension trustees will require investment managers to integrate climate risk into their solutions and asset allocation strategy. For this to work, there is a clear need for convergence and consistency between asset management regulation and rules governing pension schemes. The Government is very much aware of this and, while the FCA, the TPR and the DWP operate independently, expect greater cohesion in regulatory initiatives for pension funds and asset managers.

The industry’s input will be welcomed, through consultations and direct engagement, giving industry professionals plenty of opportunities to help shape the rules.

Communication is key

For companies and organisations ramping up their sustainability efforts, one item to consider is the importance of communication. Investors across the spectrum need to be able to demonstrate their funds, portfolios, and investments are in line with the most up to date and relevant regulation, while businesses across all sectors will need to report and disclose on their social and environmental impact.

As the ESG evolution sweeps across the economy, corporate communications will be a key function for businesses in every sector. It is crucial now to show how sustainability is a part of each company’s corporate identity. It is also critical for both investors and businesses to engage with each other to better understand expectations and drive positive change. Failure to do so will result in reputational damage over the long term and even see asset managers losing mandates and businesses being denied capital by investors for not ticking the box from an ESG perspective.

Despite good progress made in the field of sustainable finance by political leaders in the UK and Europe, there has been a continued rise in the number of activist groups targeting pensions schemes and investment managers with tactics aimed at damaging their reputations. It is therefore essential not only to engage with investee companies, key stakeholders, and report on climate impact, but also to proactively communicate on these initiatives with fund members and the public, to anticipate this type of actions and manage reputation.