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DWP eyes TCFD framework for UK workplace pensions law

Trustees could be fined thousands for non-compliance under plans

The recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) could be embedded in UK pensions law as a result of a consultation launched yesterday by the country’s Department for Work & Pensions (DWP). 

The consultation proposes mandatory TCFD reporting as the most suitable way for trustees of occupational pension funds to fulfil their fiduciary duties when it comes to factoring in risks and opportunities derived from climate change. 

Debate about whether the recommendations of the TCFD should be mandatory has been growing since their launch in 2017. Created five years ago by the Financial Stability Board, the TCFD is a governance framework that advocates for the integration of climate risk in mainstream financial filings.  

The DWP consultation is proposing that trustees should meet climate governance requirements in line with the TCFD recommendations and report on how they have done so.

It would first affect schemes with £5bn (€5.6bn) or more in assets, which the consultation says will have the capability to produce TCFD disclosures in the first instance by 2022. On an ongoing basis, DWP would later extend it gradually to schemes that exceed £1bn in assets. 

Overall, it could cover the occupational pensions of over 24 million UK citizens, representing over £1.3trn of investments, according to Mark Carney, former Bank of England Governor and now UN Special Envoy for Climate Action and Finance, Advisor to the UK Prime Minister for COP26 and Vice Chair at Canadian investment firm Brookfield. 

DWP also wants to apply existing penalty regimes where trustees fail to meet certain TCFD-related requirements set out in the consultation. A separate penalty regime is also proposed for trustees that do not publish a TCFD report at all – with fines of at least £2,500, capped to £5,000 for an individual trustee and £50,000 for a corporate trustee.

 At the same time, the UK Government has made it clear that it is not attempting to direct pension scheme investments or dictate investment strategies, insisted Pensions Minister Guy Opperman. 

The consultation noted: “Statutory guidance, which trustees must have regard to, will set out steps to meet and report on TCFD requirements. Trustees must meet the standards required by the regulations. They can diverge from statutory guidance, but they would need to be able to explain why.”

Such statutory guidance is the core of the current consultation that runs until 7 October. 

It is expected that the Pension Schemes Bill will empower the Government to introduce mandatory climate risk governance and TCFD reporting for occupational pension schemes, with a further consultation on regulations to follow before they are laid next year.

The Bill will soon go through its second reading at the House of Commons. Debates at the House of Lords finished on 15 July and the Bill was presented to the Commons on 16 July. 

Debating the Bill at the House of Lords, Baroness Stedman-Scott said in June: “We intend to make provision in regulations for scheme trustees to consider all relevant risks arising from the effects of climate change. The Government are minded, subject to consultation, to prescribe the whole range of risks cited in the TCFD’s recommendations as those which asset owners should consider.”

Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change, said the consultation will be welcomed by those many funds that already understand “the value and urgency of ensuring robust governance and reporting on climate-related risks”.

ClientEarth Lawyer Kyla Taylor described the consultation as the crucial next step towards meaningful governance and reporting by pension schemes.  

Patrick Race, Partner at Isio, a pensions advisory firm, said: “While we fully agree with the requirement to comply with the TCFD recommendations, we are likely to be looking for clarity on how some of the disclosures should be standardised across the industry.” 

The current DWP consultation, which proposes to make TCFD mandatory, is different from the one that closed in July. The latter concerns non-statutory guidance for schemes to disclose in line with the TCFD and that is expected to be finalised before Christmas.

Both implement the UK Government’s Green Finance Strategy which set out the expectation that all listed companies and large asset owners would be reporting on climate risk following the TCFD recommendations by 2022.