Since 1 October 2021, new regulations came into effect for trustees to improve the quality of governance and reporting with respect to climate change risks and opportunities for Occupational pension schemes. The regulations require trustees to identify, assess, and manage climate-related risks and opportunities and report on what they have done.
The TPR review was based on 30 reports with scheme year-end dates between 1 October 2022 and 30 September 2023 covering defined benefit, hybrid, single-employer DC schemes and a DC master trust. The review considered:
- quality and consistency of reporting against the Climate and Governance Regulations and the Department for Work and Pension's (DWP's) statutory guidance.
- whether trustees had considered the issues TPR raised in its 2023 statement on climate-related disclosures.
- how well trustees understood the range of climate-related risks and opportunities for their scheme, and explained the results of their analysis.
- how trustees intend to address the risks and opportunities they have identified, proportionate to the scheme's circumstances and other risk exposures.
The key observations from the reports reviewed which the TPR expects trustees to consider were:
- Context. Information, such as scheme size, structure of DB sections, DC popular default funds and funding level is most helpful when reported early in the report to help put the rest of the report into context for readers.
- Materiality. Where reports refer to specific investment mandates, it is helpful to explain their size in relation to total scheme assets to help the reader understand the materiality of the issue.
- Generic wording. A number of the reports reviewed contained generic wording. The quality of reports can be improved by including specifics on policies, steps to manage risks and information received from advisers.
- Developments between reports. Some trustees reporting in the second year of reporting reused some parts of the previous report. TPR indicates that this is a sensible way of producing the report provided any legal requirements continue to be met. However, where trustees take this approach, TPR expects them to supplement these elements with a summary of developments and activities during the year.
- Length. A longer report does not correlate to better quality with better reports demonstrating how disclosure requirements had been addressed in a concise way.
- Member summaries. Some reports had excellent plain English summaries and that format allowed the remainder of the report to be written with a more informed/technical reader in mind.
- Action plans. Where trustees have used the reporting process to identify additional work that needs to be carried out, they should set a plan for this, monitor progress and update on progress in their next report.
The review also found examples of trustee action on climate risk including:
- updating defined contribution default lifestyle strategies to include sustainable funds.
- increasing allocation to low carbon tracker funds. and/or to companies with 'high levels of green revenue'.
- exploring opportunities such as forestry, green bonds and/or committing funds to private market renewables.
- encouraging fund managers to engage with top carbon dioxide emitters.
In addition to the high level observations, the review also sets out specific findings in the areas of Governance, Strategy, Scenario analysis, Risk Management and Metrics and Targets with examples of better practice, areas of perceived weakness and ways to improve future reports.
The press release and the review can be found on the TPR website.