Pension Schemes Bill update: Climate Change
14th August, 2020
If you read my recent blog from 15 July this year, I highlighted Dalriada’s observations and recommendations on the Pension Climate Risk Industry Group’s (PCRIG) Guide for trustees to align schemes with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Overall, we welcome the Guide as a great step forward on the ESG journey for pension scheme trustees, while recognising that trustees will be reliant on their advisers to provide quality input and to explain the methods and data they have used.
Following that blog, I note the progress of the Pension Schemes Bill 2019-21 through Parliament and the introduction by the Government at Committee Stage of a new clause which would secure “effective governance of the effect of climate change”. Clause 124 would make amendments to the Pensions Act 1995 to:
- Impose requirements on trustees to secure effective governance on the effect of climate change on the scheme.
- Set out the kinds of activities trustees may be required to undertake as part of their governance on the effects of climate change.
Backbench and opposition Peers argued for alignment with the Paris agreement objectives or reporting the extent of alignment with them. In response, Work and Pensions Minister, Baroness Stedman Scott said Government’s view was that “the industry is not quite ready for this sizeable step in reporting requirements” and that there was, as yet, little consensus on methodologies for reporting on Paris alignment. The Government was seeking powers to prescribe such reporting in future.
Accounting for climate change
At Report Stage, the Government amended clause 124 so that it would require pension scheme trustees to “explicitly consider climate change goals, including the Paris agreement temperature goal, for the purpose of ensuring the effective governance of their schemes with respect to the effects of climate change”.
The Work and Pensions Minister explained that the amendments would:
- Make it explicit that regulations may require scheme trustees to account for the different ways in which the climate might change and the steps that might be taken as a result.
- Allow regulations to be made requiring trustees to adopt prescribed assumptions about achievement of the Paris Agreement goal (defined by reference to Article 2.1a) and other climate change goals, or the steps that may be taken to achieve them.
- Ensure that trustees could be required to publish information relating to the assessments they make by reference to the Paris Agreement goal or other climate change goals under Section 41A. This would include publication of the contribution of a scheme’s assets to climate change.
The Government has said it does not intend to “impose needless burdens on schemes” and will “begin with large schemes and then consider costs and benefits carefully before we extend any requirements to smaller schemes”. It added that this was in line with the direction of travel of the United Nations Principles for Responsible Investment initiative, which “already requires signatories to carry out some TCFD-based reporting and has recently consulted on extending reporting requirements”.
Given that clause 124 is likely to increase the accountabilities and reporting requirements for schemes in relation to climate change, trustees may wish to discuss this with their advisers. With implementation statement requirements starting in October this year, this area of reporting is only going to get ever more regulated in future.