With Glasgow set to host COP26 in just a few weeks' time, climate change is undeniably at the forefront of the world's collective consciousness. Nowhere is it more evident than in the pensions industry with a raft of new climate related developments having taken place over the last few months in the lead up to COP26. Here, we take a closer look at some of the key developments.
New climate change governance and reporting requirements for trustees
Following on from the Pensions Act 2021, (see our most recent blog here) the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 ("the Regulations") have been approved by Parliament. These detail the requirements trustees of occupational pension schemes must comply with in respect of climate change-related governance.
Broadly speaking, trustees must, on an ongoing basis, identify, assess and manage climate-related risks and opportunities that are relevant to the scheme. In particular, they must assess those which will have an effect on the scheme's investment and funding strategies and climate-related risks must be integrated into the scheme's overall risk management. Trustees must also set targets in respect of climate change (guidance on which can be found in the Regulations) and measure the scheme's performance in this respect annually. They must publicly report on their compliance with these requirements within 7 months of the year end date of the scheme.
The entry into force of the Regulations is set to be phased, with the earliest date of application for occupational schemes with £5 billion or more in assets and authorised master trusts set as 1 October 2021. From October 2022, the requirements will capture schemes with £1 billion or more in assets and it is anticipated this will gradually be extended to smaller schemes.
Draft guidance on the new regime, which has now been finalised, was published by the Department for Work and Pensions in June 2021 (and updated in July 2021). A consultation on "Draft guidance on governance and reporting of climate-related risks and opportunities" published by the Pensions Regulator ended on 31 August and the Government's response to that is still awaited.
Occupational Pensions Stewardship Council (OPSC)
In early July, the Department for Work and Pensions established a new Occupational Pensions Stewardship Council. The stated aim of the Council is to 'promote and facilitate high standards of stewardship of pensions assets'. It seeks to achieve this by providing a forum to share best practice and collaborate on stewardship activities, including shareholder resolutions, climate change and corporate governance. It also intends to bolster the voice of trustees in the market.
The Council currently has 28 pension scheme members, responsible for over £550 billion in assets. Going forward, it is hoped that the Council will help to steer members towards more sustainable and climate-focused strategies and influence the wider market in turn.
Financial Conduct Authority (FCA) consultation on enhanced climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers
June 2021 saw the publication by the FCA of a consultation paper on enhancing climate-related financial disclosures by asset managers, life insurers and FCA-regulated pension providers. The proposed regime would require annual publication by firms of an entity-level report, covering how the firm takes climate-related risks and opportunities into consideration in managing client investments. In addition, firms would have to publish annually a baseline set of disclosures in relation to their products and portfolios. The three outcomes FCA hope to achieve through the regime are better client and consumer outcomes, deeper consideration of climate-related risks and opportunities by in-scope firms and coordinated information flow along the investment chain.
Whilst the requirement for trustees to take account of climate change in scheme governance is not new and has been around for a while now, with COP26 looming, it is being brought into sharper focus and it is clear that pension scheme climate change requirements are only going to become more extensive. Trustees and employers should have had climate change on their radar for some time but it is essential that, if they haven’t already, that they now making preparations to comply with the new governance and reporting regime ahead of time.
If you would like to discuss anything raised in this blog, please get in touch with a member of the pensions team, or your usual Brodies contact.
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Trainee Solicitor
