Climate risk can sometimes feel like a dark shadow looming over a pension scheme. It’s not fully discernible, but you know it’s there, and you have a nagging feeling that it’s something you should be dealing with… but how? And what if you’d also like to leverage your influence as an asset owner to have an impact on climate change? Whether it’s climate risk, climate impact or both that have been playing on your mind, there is now a good amount of experience from early movers which can help shape the next steps for those who are looking to move ahead on their climate journey.
In our previous article: Navigating climate risks: A perspective on trustee fiduciary duty in UK pension schemes, we explored how trustees might think about managing climate risk and, where appropriate, have a positive impact on climate change through the lens of their fiduciary duty. One of the challenges we raised was the need for further guidance for trustees in relation to exercising their fiduciary duty. Specifically, in the context of choosing investments that could have a positive climate impact but potentially a lower expected return compared to alternative investments. We hope that the new government continues the existing Department for Work and Pensions (DWP) plans for roundtables to give more guidance to trustees in this key area.
While we’re expecting further guidance to come on fiduciary duty, many schemes have felt able to take tangible steps already.
While we’re expecting further guidance to come on fiduciary duty, many schemes have felt able to take tangible steps already. The Pensions Regulator (TPR) highlighted examples of ways schemes were addressing climate risks in its second review of climate-related disclosure reports (sometimes known as Task Force on Climate-related Financial Disclosures (TCFD) reports)[1], a requirement for the largest pension schemes in the UK.
In this article, we explore some of the practical actions that trustee boards can take as they navigate their climate journeys. These actions can be applied to all pension schemes, irrespective of size.
Figure 1: What is your climate mission?
Narrow mission
Pay benefits as they fall due
Member mission
Maximise the value of members' benefits
Wider mission
A £ of pension is worth more in a world worth living in
The impacts of climate change are wide-reaching and complex, and it can make understanding and managing the impact of climate risk on a pension scheme a daunting task. It can therefore be helpful to follow a structured approach like we’ve set out in this article. In-depth climate training will also provide a solid understanding of the challenges and opportunities that climate change poses. Together, we believe that these actions can push back the dark clouds and illuminate your path toward climate action. In our next article, we will cover the governance challenges of managing climate risk, so look out for that release shortly.
Footnotes
- “Review of climate-related disclosures by occupational pension schemes: Year 2,” The Pensions Regulator. Return to article
- “Governance and reporting of climate change risk: guidance for trustees of occupational schemes,” Department for Work and Pensions, June 2021. Return to article
Contacts
Climate change implications for pension schemes
It is important that pension scheme trustees and sponsors consider the implications of climate change risks for their pension arrangements and the part they can play in responding to the challenge.
