What UK pensions investors have learned from climate reporting

Mem­bers of the UK’s largest pen­sion schemes won’t have to wait much longer to learn how their pen­sions are impact­ing the envi­ron­ment.

The Task Force on Cli­mate-Relat­ed Finan­cial Dis­clo­sures (TCFD) report­ing frame­work came into effect in Octo­ber, start­ing the count­down for a host of work­place pen­sion schemes to pub­lish their reports. The first batch is poised to be released in the next few months. 

The new rules apply to schemes with more than £5bn of assets under man­age­ment, as well as mas­ter trusts of all sizes. Schemes with more than £1bn of assets under man­age­ment will have to start com­ply­ing with the rules from Octo­ber 2022.

While the reg­u­la­tion is already live for those larg­er schemes and mas­ter trusts, they have sev­en months from the end of their scheme year to pro­duce their report. For instance, if a scheme’s year end­ed in Decem­ber, it will have until July to pub­lish. Most schemes either run from Jan­u­ary to Decem­ber or April to March, says Stu­art O’Brien, a part­ner at Sack­ers.

How­ev­er, it’s not just the actu­al TCFD report that schemes must wor­ry about. They also have sev­er­al gov­er­nance-relat­ed activ­i­ties that need to be com­plet­ed before the end of their scheme year. That means the new rules have had vary­ing impacts, depend­ing on when that date has land­ed.

“If you were a Decem­ber year-end, you had a lot to do in a short space of time and although schemes were try­ing to do a lot of prepara­to­ry work, there will be things that weren’t quite done before the scheme year end­ed,” says O’Brien. 

Those tasks include car­ry­ing out cli­mate sce­nario analy­sis, for­mal­is­ing gov­er­nance poli­cies, and iden­ti­fy­ing three cli­mate-relat­ed met­rics and how they will be mea­sured. The first two of those are set cri­te­ria: the total emis­sions of a scheme’s asset port­fo­lio and its car­bon foot­print. Schemes then have the free­dom to choose a third met­ric that isn’t emis­sions relat­ed.

Engaging with asset managers

Since the new rules entered force, the Depart­ment for Work and Pen­sions has con­sult­ed on includ­ing a fourth met­ric focused on how schemes’ invest­ments are aligned with the Paris Agree­ment net-zero goals. This is expect­ed to be intro­duced from Octo­ber this year.

“The con­sul­ta­tion sug­gest­ed schemes already in scope of the TCFD require­ments might choose to vol­un­tar­i­ly use that as their third met­ric for the first year of com­pli­ance to effec­tive­ly give them a dry run at it for next year,” says Simon Borhan, a man­ag­ing asso­ciate in Lin­klaters’ pen­sion funds group.

One chal­lenge for many schemes is access­ing qual­i­ty data that is con­sis­tent and usable. Trustees should engage with their asset man­agers as soon as pos­si­ble to ensure the data pro­vid­ed is suit­able.

“The report is not some­thing you can pull togeth­er in a week, so engag­ing ear­ly and start­ing to grad­u­al­ly ease your way into com­pli­ance at an ear­ly stage real­ly does help, rather than sud­den­ly hit­ting a cliff-edge at the end of the sev­en months. That might look like a long way away, but don’t under­es­ti­mate the amount of work that it will take,” says Borhan.

Giv­en that this is the first year of TCFD report­ing, some schemes are unsure how can­did they need to be when dis­clos­ing where they have gaps in their data.

“There is a bit of ten­ta­tive­ness at the moment, not because they want to hold any­thing back but there is a sense that if they are real­ly open and hon­est while oth­ers are not, it could make it look they haven’t got a good han­dle on this,” says Helen Pri­or, a client direc­tor at Car­dano.

While schemes might be reluc­tant to sign­post any short­com­ings, it will be more dam­ag­ing in the long run if they mis­rep­re­sent how far ahead they are, says Pri­or.

“Every­one is in the same boat and actu­al­ly if you are open and hon­est about what you’re still grap­pling with, you can frame it as you are on a jour­ney and that you expect the qual­i­ty of report­ing will improve as bet­ter data and best prac­tice emerges,” she says.

Managing climate-related risks

Some trustees might also strug­gle with how to present the report, giv­en that it has mul­ti­ple poten­tial read­ers, includ­ing reg­u­la­tors, scheme mem­bers and activist groups. That means the first reports are like­ly to be quite hefty.

“There will be a ten­den­cy to just make sure that every­thing is cov­ered and pro­duce a very long report,” says O’Brien. “How much val­ue that will be to pen­sion scheme mem­bers is anoth­er mat­ter. These will be dense doc­u­ments, full of jar­gon about sce­nario analy­sis that won’t be very read­able.”

To counter this, O’Brien sug­gests schemes should pro­duce the main report for the reg­u­la­tor and then cre­ate a more com­pact, intel­li­gi­ble ver­sion for scheme mem­bers that directs them to the main report if they are inter­est­ed.

Some trustees face anoth­er chal­lenge: what hap­pens when the data shows that cer­tain parts of their asset port­fo­lio have high car­bon expo­sures? Jen­nifer O’Neill, a respon­si­ble invest­ment con­sul­tant at Aon, calls this the divest­ment dilem­ma. Do schemes exit funds that are car­bon inten­sive or do they engage with those invest­ment man­agers to try to mit­i­gate the risks?

“Engage­ment is key,” she says. “While you need to reserve the right to be able to exit if that engage­ment isn’t fruit­ful, engag­ing first rather than mak­ing a snap deci­sion that’s pred­i­cat­ed on one data point with­out under­stand­ing the full con­text is very impor­tant.”


Trustees should also be care­ful not to treat TCFD as a mere box-tick­ing exer­cise and remem­ber that cli­mate change could have an adverse impact on the size of their mem­bers’ pen­sions.

“It’s impor­tant not to lose sight of the wood for the trees,” says O’Brien. “The regs are quite pre­scrip­tive in terms of the things you have to do, but the whole point of this is that trustees should be man­ag­ing cli­mate risk as it presents finan­cial risk to their invest­ment port­fo­lios. It’s quite easy to lose sight of that and start mea­sur­ing things just for the sake of mea­sur­ing things.”