The Pensions Regulator issues climate risk warning to trustees

The report sets out the risks from climate change the regulator believes are most relevant to occupational schemes, as well as its expected approaches to tackling them.

Defined benefit schemes did not come out much better than DC in the report findings, with just 51 per cent allocating time or resource to assessing any financial risks and opportunities associated with climate change. This was ahead of 43 per cent of DC schemes that had effectively integrated risks and accounted for their impacts.

However, the regulator also said its findings proved schemes could see a positive impact from considering climate change in their investment and scheme governance. These included on expected returns, capacity to reduce risk, and opportunities to access new markets and technologies related to the transition to a low-carbon economy.

TPR has said pension schemes across the UK “still have much work to do” if they are to adapt to the challenges of climate change and upcoming reporting requirements that will place climate-risk assessment front and centre in their work.

While TPR acknowledged the barriers impacting trustees’ ability to properly integrate climate risks, such as data availability, Counsell said the regulator “remained convinced that a landscape of resilient pension schemes that protect savings from climate risk is entirely in reach”.

The regulator is expecting to see improvements in data quality and modelling capabilities which will reduce issues for trustees moving forward.

It pointed to mandatory reporting, such as Taskforce on Climate-related Financial Disclosure (TCFD) rules and the government’s new Sustainability Disclosure Requirements, as the catalysts for these expected improvements.

In the meantime, trustees should be allocating more time and resource to assessing risks and opportunities associated with climate change, Counsell warned. Trustees should also ensure the processes used to manage those risks are robust.

However, he acknowledged: “Our report recognises that practices are evolving, and trustees – and savers – are more engaged with the need to consider climate risks.”

Today’s report follows on from TPR’s 2021-2024 climate strategy, released in April, which also stressed the important of schemes’ understanding of both their compliance obligations in relation to climate risk, and the importance of climate change more broadly.

Cross-regulatory approaches

It also comes alongside reports from the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), as well as a joint statement from all three bodies along with the Financial Reporting Council (FRC).

“As UK financial regulators, we are focused on making sure that the risks from climate change and the opportunities from the transition to a net-zero economy are being identified and proactively managed across the financial sector,” the four said. “Doing so creates opportunities for UK companies and consumers, as well as helping address climate change.”

In its own climate report yesterday, the FCA set out the steps already taken to mitigate climate risks and highlighted sectors that needed further work, including retail investment and mortgages. It also looks at how the industry is making commitments to reach net zero and government and transition plans in place to support them.

FCA CEO Nikhil Rathi said: “To successfully transition to a net zero economy requires not only that firms adapt and innovate, but that we regulators do too. That is why we are leading the effort to ensure there are consistent, trusted standards for disclosure investors can rely on. Our work in partnership with the PRA, TPR and FRC is a vital part of that effort.”

Meanwhile, the PRA’s climate adaptation report – also published today – outlined the risks from climate change to its various objectives. It has a particular focus on how some firms are more materially advanced than others on their tangible progress toward embedding financial risks in investment strategies.

“It is our job to ensure the financial institutions we regulate are prepared for these changes and able to play their part in supporting the transition,” said PRA deputy governor for prudential regulation and CEO Sam Woods.

FRC CEO Sir Jon Thompson said reporting and business activities needed to adapt to meet the challenges of how actuaries, auditors, investors, and all parties in the industry were adapting to climate challenges.

“While a lot of good work has happened, there is more to do,” he said. “The FRC supports the development of global standards for sustainability reporting.”

This article originally appeared at Professional Pensions.