PCRIG consultation on climate-related risk ‘an important step’

Consultation launched to help trustees manage climate-related risk

The Pensions Regulator and an investment spokesperson have welcomed the recent launch of a consultation aiming to help trustees manage climate-related risk as a “great opportunity” for the sector

On 12 March, pensions minister Guy Opperman announced the public consultation on new non-statutory guidance for trustees of occupational pension schemes on the risk and opportunities associated with climate change.

The consultation will be carried out by the Pensions Climate Risk Industry Group (PCRIG) a group set up last summer by the Department of Work and Pensions, The Pensions Regulator (TPR) and other pension representatives, which has drawn up a draft guide entitled Aligning your pension scheme with the TCFD [Task Force on Climate-related Financial Disclosures] recommendations: consultation guidance.

In the guide, Opperman said: “Tackling climate change is one of the defining issues of the 21st Century. It is a top priority for me as minister for pensions and financial inclusion. I am committed to ensuring all pension scheme trustees do everything they can to act to limit the risk climate change poses to their members’ future retirement income. These actions will also have beneficial impacts on our planet.

“TCFD is the most widely-adopted way in which organisations are managing and reporting climate risk, I want to ensure all trustees have the help they need to align their schemes with its recommendations.”

The guide aims to help trustees evaluate the way in which climate-related risks and opportunities may affect their strategies by making use of the recommendation of the TFCD.

It sets out suggested approaches for the integration and disclosure of climate risk within the typical governance and decision-making processes of pension trustee boards, but said as many pension schemes will be new to this exercise, they may wish to prioritise the adoption of robust governance procedures before moving on to public disclosure.

PCRIG’s guide outlines distinct characteristics of climate change that require a different approach:

  • Far-reaching impact in breadth and magnitude: Climate change will affect all actors in the economy, across all sectors and geographies. The risks will likely be correlated with and potentially aggravated by tipping points, in a non-linear fashion. This means the impacts could be much larger, and more widespread and diverse than those of other structural changes.
  • Irreversibility: The impact of climate change is determined by the concentration of greenhouse gas emissions in the atmosphere and there is currently no mature technology to reverse this process. Above a certain threshold, scientises have shown with a high degree of confidence that climate change will have irreversible consequences on our planet, though uncertainty remains about the exact severity and horizon.
  • Foreseeable nature: While the exact outcomes, time horizon and future pathway are uncertain, there is a high degree of certainty that some combination of physical and transition risk will materialise in the future.
  • Dependency on short-term actions: The magnitude and nature of future impacts will be determined by the actions taken today, which thus need to follow a credible and forward-looking policy path.

The report added: “The impact on pension schemes as investors may not be immediately obvious or uniform. For example, whilst the utility sector is one of the most strongly exposed to climate policy risk, it may contribute a relatively small proportion of a typical pension scheme’s investment portfolio. On the other hand, manufacturing may have a lower sectoral risk but may constitute a larger part of a pension scheme’s portfolio and may therefore have a greater overall effect. Trustees need to consider the impacts across their portfolios as a whole.”

There is also information on metrics trustees may wish to consider using to record and report their findings and details on recommended scenario analysis.

David Fairs, executive director of regulatory policy, analysis and advice at TPR, commented: “Climate change is a core financial risk which pensions trustees must consider when setting out their investment strategy.

“That’s why PCRIG’s guide is so important as it will help trustees demonstrate how they are taking this and other financially material considerations into account over the lifespan of their investments.

“I urge the industry to take part in this consultation and help shape guidance which will ultimately mean savers are best protected from the far-reaching financial risks that could arise from climate change and a transition to a carbon-neutral economy.”

Meanwhile, Kate Brett (pictured), European head of responsible investment at Mercer, also urged trustees to take action: “We welcome the Pensions Climate Risk Industry Group consultation as a great opportunity for the pensions sector to show leadership in the area of climate change financial reporting. This is an important step towards better reporting, but one that needs to be accompanied by greater transparency in ESG and climate change reporting on part of the investment community as a whole. 

“Trustees should start getting the wheels in motion now by understanding where their exposure to climate-related financial risks lie through climate scenario analysis and stress testing.  Schemes should be considering alignment to the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), including carbon footprinting their portfolios and challenging their investment managers on their climate implementation policies and approach to stewardship.”

The consultation closes on 7 May 2020, with PCRIG aiming to publish final guidance in Autumn 2020.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...