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Storm clouds on the horizon: practical steps schemes can take now to address climate change

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By Nicola van Dyk | June 10, 2021

What trustees can do to start integrating climate considerations into the way they run their pension schemes.

It’s hard not to feel overwhelmed by the flood of information hitting our screens about the dire consequences of climate change and the urgent actions we should be taking. It’s a massive and complex subject, and an emotive one with references to ‘an existential crisis’ and ‘a global systemic risk’. Speaking at Willis Towers Watson’s recent Climate Summit, Guy Opperman, Minister for Pensions and Financial Inclusion, emphasised that climate risk is a financially material risk for pension schemes and that engagement with this issue is vital.

While some pension schemes are being pushed to act quickly by the Taskforce on Climate-related Financial Disclosures (TCFD) requirements embedded in the Pension Schemes Act 2021, many others are grappling with how to fit climate risk into their strategic and governance plans alongside existing activities. So what can trustees do to start integrating climate considerations into the way they run their pension schemes?

Facilitated training can demystify the jargon and build a solid foundation for the work to come

While many of us will have heard about the Paris Agreement, net zero targets, greenhouse gases and rising sea levels, we may still find some of the jargon baffling and struggle to work out how all the metrics and targets fit together. As we begin to embed climate considerations into the governance of pension schemes it’s going to be important to do so from a firm foundation. The good news is that this doesn’t mean you need to become a climate expert but there are certain key targets and terminology that it would be helpful to be familiar with.

As we begin to embed climate considerations into the governance of pension schemes it’s going to be important to do so from a firm foundation.

Building on that, you’ll need a clear understanding of the pension scheme requirements – the implementation dates and the TCFD requirements. These TCFD requirements go well beyond simple reporting and will require you to put in place governance structures, carry out modelling, build climate into your investment and funding strategies, and carry out regular monitoring.

Our experience to date is that trustees are highly engaged with this subject. For that reason, we recommend scheduling a live training session that will allow you and your fellow trustees to ask questions, share their perspectives and start shaping the direction of travel for the scheme. Our climate experts would be happy to support with training sessions irrespective of whether we have an existing relationship with your scheme.

Work out who will be responsible for climate governance early on

Addressing climate risk is not a one-off project, it’s a long-term change in governance of the pension scheme.

Addressing climate risk is not a one-off project, it’s a long-term change in governance of the pension scheme. Over time this will permeate through many of the areas the trustees are responsible for, from investments to funding, covenant and member engagement. It is also a fast-moving area and so it may be appropriate to identify a sub-group of the trustees to take responsibility for integrating these considerations into your day-to-day operations.

A lot of the early activity is likely to relate to investments and covenant, and so selecting trustees who are already engaged in those areas could be a good starting point.

Investment strategy will be central, start by exploring your current beliefs

Investment issues related to climate risks faced by companies in your portfolio are at the centre of the TCFD requirements for pension schemes. Ascertaining the trustees’ beliefs about the risk and return implications of climate change and exploring the role of stewardship will be a key first step in developing the pension scheme’s climate risk strategy.

Investment advisers should be well placed to facilitate a beliefs discussion and walk you through the key areas you will need to consider on their journey, setting a good foundation for the work to come.

Consider how your sponsor is addressing climate change

While the companies you invest in could face climate-related risks so could your sponsor.

While the companies you invest in could face climate-related risks so could your sponsor. We hear regularly of companies that are changing their business models in response to climate regulations. As business models and drivers change, or fail to do so in the face of regulatory pressure, so does covenant – whether the change is material to your scheme will depend on your circumstances. At worst, schemes could be surprised by material deteriorations in covenant which leave them exposed to unacceptable levels of investment or funding risk and even to unrecoverable Section 75 debts.

We are increasingly seeing companies engaging with the TCFD requirements on an enterprise-wide basis and/or introducing sustainability teams. Opening lines of communication with the sponsor on this subject will help ensure alignment at an early stage as you move along your own climate change journey.

You can make a difference

Climate change is undoubtedly a big problem and it is easy to feel helpless in the face of what needs to be achieved. In the words of Guy Opperman “if you accept that you want to leave a planet that is a better place for your kids and grandkids then [dealing with climate change] is something we have to do so don’t abrogate responsibility”.

Climate change is not only about risk management; there are also opportunities.

Climate change is not only about risk management; there are also opportunities. A greater focus on climate issues can deliver real benefits in terms of better risk-adjusted returns, improving the security of members’ benefits and reducing costs for the employer.

Some trustees may question how this can be squared with their fiduciary duties and whether they can afford to divert focus to climate issues on top of everything else on their agendas. We would argue that a proactive approach to climate issues is entirely consistent with, and does not compete with, trustees’ fiduciary duties. Indeed, we would challenge you to consider whether you can afford not to pay close attention to the issue and use your stewardship power to influence the direction and speed of travel of companies as they move towards a zero-carbon future.

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Nicola van Dyk
Senior Director, Retirement

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