Taking action on climate risk: improving governance and reporting by occupational pension schemes – Sackers’ response to consultation

Background

The DWP is consulting on changes to occupational pension schemes’ governance of and reporting on climate change. The proposals would require schemes to assess and manage climate risks and opportunities, and to publish a climate change report annually (in line with recommendations by the Taskforce on Climate-related Financial Disclosures (“TCFD”)).

Under the proposals, schemes with £5 billion or more in assets, authorised master trusts and authorised collective money purchase schemes would need to have arrangements in place on climate change governance, strategy, risk management, metrics and targets from October 2021, and to publish an annual report on these by the end of 2022 at the latest. The requirements would then be rolled out to schemes with £1 billion or more of assets the following year. Application to smaller schemes will be reviewed in 2024.

In this response

• General comments

General comments

We welcome the opportunity to respond to this consultation and provide general comments below in relation to the areas which are most pertinent to our practice and client base.

Asset classes

Given the Government’s desire is to produce decision useful information, we are concerned by the proposal to apply the new governance and reporting requirements to all of a scheme’s assets and would suggest that the DWP consider excluding the following asset classes from scope:

• insured annuities. Trustees do not have control over and therefore cannot influence the management of these assets. They are also subject to another regulatory regime
• gilts, cash and derivatives. It will not be possible to report meaningfully on these assets in relation to climate risk. In our view, leaving them within scope would be likely to lead to “green reporting” and just the tick-box approach the DWP wishes to avoid.

Restricting the asset classes as we suggest would result in meaningful disclosures and ensure that the phasing-in of the requirements applies appropriately.

In addition, our clients have highlighted that many schemes hold heavily diversified pooled funds, which are intended to efficiently balance the risks associated with equity investments. As such funds are often invested in thousands of companies, obtaining the necessary information to meet the new requirements would be difficult, even for larger schemes, as would assimilating the data and presenting it in a meaningful way. We would suggest the Government consider whether there are any ways of mitigating the burden these proposals would impose in relation to this sort of fund.

Deadlines for the first reports

We note that the current proposals require compliance by the earlier of 7 months from the current (as at 1 October 2021 / 22) scheme year end date and 31 December 2022 / 23 (depending on asset size). This timetable is likely to be problematic for schemes with year-ends between 31 May and 30 September (of which there are many within our client base). Such schemes will have less, and potentially significantly less, than 7 months to produce their first report. This seems unfair and could result in an inability for them to provide meaningful reports in the first year.

We appreciate the Government’s desire to attain the goal, set out in its Green Finance Strategy, of all listed companies and large asset owners disclosing in line with the TCFD recommendations by the end of 2022 but consider it would be appropriate to give all schemes until 7 months from their year-end to comply. This timetable would also have the benefit of bringing the drafting of the TCFD report into line with that of the scheme’s annual report from the outset.

Regulatory overlap

The investment disclosure requirements have increased significantly over the last few years. While we understand that this is necessary to ensure appropriate consideration and disclosure of investment risks such as climate change, many of the requirements are similar. Requiring similar information to be set out in different publications results in an unnecessary governance burden on trustees and makes it harder for those wishing to analyse the information to do so, as it is in several different places. When finalising the proposals, we would suggest the DWP consider the extent to which the disclosure requirements are already addressed by, in particular, the statement of investment principles and the implementation statement.

We welcome the ability to include a link to the new TCFD report in the scheme’s annual report and welcome the ability for DC schemes to provide a single link to all the relevant published information. We would also encourage the DWP to consider introducing flexibility for schemes to provide combined reporting on their ESG, climate and engagement policies via a single publication if they choose to do so.

Notifying DB members of the location of the TCFD report

Annual benefit statements must only be provided to scheme members with money purchase benefits. As it is also an annual requirement, we would agree that, for DB schemes, the best option for signposting the TCFD report is the summary funding statement. This document could also be used to notify members of the location of the scheme’s SIP and implementation statement.

Focus on target metrics

We note that the focus on target metrics and the level of monitoring required (quarterly) could be quite burdensome and may not be decision-useful. Further, use of metrics can often steer trustees to disinvestment as it is may be the quickest way in which to meet a particular target, such as Paris-Alignment. While disinvestment may ultimately be necessary if a company fails to respond to engagement on climate-related issues, engagement should be the first step. Putting greater emphasis on engagement may be preferable in order to achieve behavioural change; the ultimate aim of all the climate change measures.

In addition, reporting against metrics will only be possible if the necessary information is provided by the relevant manager(s). We note that the DWP appreciates that certain information may not yet be available and / or readily provided and that the FCA intends to clarify its position on how best to enhance climate-related disclosures by regulated firms, including asset managers, in due course. In our view, a corresponding obligation on asset managers to provide the necessary information on request (as was done for the reporting of transaction costs with effect from 3 January 2018), would be the best way to address the latter issue. As for the former, it is not clear to us how much information managers are able to provide and we would urge the DWP to clarify this before moving forwards. We understand that pension schemes are able to engage a third-party provider to measure their portfolio against one or more specified metrics. However, such services inevitably come at a cost, which is likely to be prohibitive for some.

The DWP acknowledges that trustees will be heavily dependent on data from other parts of the investment chain. Therefore, initially, it will only require trustees to comply with requirements on scenario analysis, calculating metrics and reporting against targets “as far as they are able”. It is imperative that the meaning of this phrase is made clear in the regulations and / or the supporting guidance. In particular, the DWP should address:

• to what extent it would expect costs to be incurred?
• whether trustees would be expected to change managers if their incumbent, however good they otherwise are, is unwilling or unable to provide the necessary data?

TPR’s powers

We support the provision of a mandatory fine being restricted to wholesale non-compliance (ie not producing a report) and agree that TPR should otherwise have discretion as to whether to apply a penalty. However, we note that TPR’s discretionary powers are intended to be used where the report is deemed to be “inadequate” in meeting the requirements in the regulations. If the nature of trustees’ disclosures are to be measured, then it must be clear from the regulations and or supporting guidance exactly what is expected. In addition, we refer you back to our previous comment; the trustees may be unable to provide further detail on certain matters. While we appreciate the fact that “high quality climate governance and disclosures by occupational pension schemes are a strategic priority for the DWP”, we note that this may only be possible once both trustees’ understanding of the requirements and the necessary data flows are sufficiently developed. We would also caution that the provision of detailed guidance on what TPR would expect to see in a report can promote tick-boxing. It would perhaps be more useful for TPR and the DWP to be able to see from reports where there are gaps in availability of information and / or to engage directly with individual schemes where there are concerns about their investment governance.