Some of the UK’s largest pension schemes have raised concerns over the burden of mandatory TCFD reporting ahead of a swathe of smaller schemes being required to produce a report for the first time.
Under regulation introduced last year, schemes with more than £5 billion ($5.8 billion; €5.82 billion) in assets were required to produce a TCFD report by seven months after their year end, with 23 reports in the first wave. The threshold will drop to £1 billion in October as part of the UK government’s rollout of mandatory reporting across the economy.
Some of the country’s biggest pension funds have raised concerns about the burden placed on them by the regulations, prompting fears that smaller schemes may find the process unmanageable.
David Russell, head of responsible investment at the £91 billion Universities Superannuation Scheme (USS), says the TCFD itself is “a good framework to follow”. “It helps funds structure their governance structure, their risk management processes and encourages scenario analysis, and clearly sets out [that] we need to have targets and measure against them.”
He is less enthusiastic about the new reporting requirements introduced by the UK’s Department for Work and Pensions (DWP) last autumn, calling them “onerous” and “burdensome”.
Russell’s main criticism of the regulation is the level of detail required from pension schemes. He draws comparisons with the UK’s stewardship code, a relatively loose series of 12 principles to report against. By contrast, he says, the TCFD regulations contain “too much minutiae”.
While he understands the need for the DWP to regulate in order to encourage schemes that were not producing their own reports to do more, Russell says it has added to an already substantial reporting burden on pension schemes.
“Between producing TCFD, PRI and Stewardship Code reports and producing an implementation statement, I spend roughly half a year managing reporting, which is not a sensible use of our members’ money,” he says. “It’s an overregulation.”
He adds: “I don’t expect people to feel sorry for us, but I do expect that they would rather we spend the majority of our time managing climate risk and doing stewardship than reporting about it.”
As the UK’s largest pension scheme, which boasts a seven-strong RI team, USS is in a good position to produce its report – but Russell says he is concerned that the regulations were “practically undeliverable for smaller funds and a licence to print money for consultants and service providers who smaller funds will have to use to do this”.
Claire Jones, partner and head of responsible investment at consultancy LCP, rejects this assessment – although she admits there is “quite a lot of hand-holding” required in helping schemes with their TCFD reports. “It comes back to the point about the regulations being very detailed,” she says. “For lot of schemes, this is very new.”
LCP is providing TCFD-related services to around 10 schemes in the £5 billion tranche and around 50 in the £1 billion tranche, which have another year to produce their first reports.
Jones agrees that the regulations as written were “very, very detailed and quite prescriptive in places”. She would like to see the DWP move to a more principles-based approach in future. “Not many funds have sufficient resources, let alone expertise, to manage the entire process in-house,” she says.
As time goes on, however, she hopes the process will simplify and consultants will “find ways of getting to the critical things more quickly”.
The data dilemma
As with many things in the world of ESG, one of the major complications for schemes putting together their reports is quality and availability of data.
Katharina Lindmeier, senior responsible investment manager at £24 billion workplace pension scheme Nest, says data was the most challenging issue it faced when putting together its report. The scheme has been reporting against TCFD recommendations since 2017 and carried out a dry run last year based on draft guidance put out by the DWP.
At the moment, the majority of Nest’s data is sourced from asset managers. The scheme could use a data provider for public markets, but for private markets it is “totally reliant” on managers to collect data directly, says Lindmeier. She also notes that Nest has to use a consultant for its scenario analysis due to a lack of in-house expertise, which is “a fairly significant exercise and obviously cost”.
Getting the right data has also been an issue for the £57.5 billion BT Pension Scheme. Its head of sustainable investments, Victoria Barron, says the scale of gathering and interpreting data was “humongous”.
“You’re trying to collect a variety of data across all of your different asset classes, you’re trying to co-ordinate scenario analysis on assets, liabilities and then the covenant – if you’re a corporate scheme, you have to engage with the corporate to ensure they agree with your analysis. Then you need to have a discussion about it, then it goes in the report.
“The trustees also need training to understand information being presented to them, and all the while, you’re trying to make sure that the numbers you’re collecting are the best numbers and you’re hopefully not lying to anybody.”
Data on private investments is a particular concern. Consultancy Hymans Robertson has warned that compliance with the regulations could be placed “in jeopardy” by the poor quality and availability of private manager data. Half of the firm’s queries to its clients’ managers went unanswered and data availability was poor for funds across private asset classes.
To make things more difficult for schemes in the first couple of years of reporting, the requirements for asset managers and corporates are not yet in place. Schemes are therefore unable to rely on their reported numbers, a situation LCP’s Jones describes as “bizarre”.
The explanation for the mismatch lies in a quirk of the UK’s legislative system. The regulation for pension schemes needed to be bolted on to a convenient piece of legislation going through Parliament at the time, whereas the Financial Conduct Authority does not require separate legislation to introduce new regulations for asset managers and corporates that it regulates.
Even with the data gathered, there are plenty of technical issues to be ironed out. Lindmeier says many of its managers use a weighted average carbon intensity (WACI) metric, whereas DWP guidance asks for enterprise value, including cash (EVIC), which is harder to obtain for private markets investments.
Both she and Russell raise issues around calculating emissions from sovereign bond holdings, which comprise a significant part of many defined benefit schemes’ portfolios.
Meanwhile, Barron notes that implied temperature rise and alignment metrics, while helpful to some extent, “obfuscate the complexity of the calculations that sit behind them”. “Reducing all of your climate alignment down to one number is challenging,” she says.
A reasonable regulator
Fortunately for concerned schemes, trustees are only expected to report on data and scenario analysis “as far as they are able” under the regulations. In published guidance, the DWP said it recognised that trustees may have problems obtaining data in some areas. It advised them to use modelling or estimation to fill small gaps or explain why they were unable to obtain data in their reports. Schemes are also not required to report Scope 3 emissions data in their first year of reporting.
The UK’s Pensions Regulator, which is responsible for assessing the published reports and is currently looking at the 23 reports in the first tranche, is aware of concerns. Mark Hill, its climate and sustainability lead, says many trustee concerns are valid.
“We know there are gaps in data,” he says. “We know there are issues of timeliness and consistency. So it’s the best schemes can do currently. But they also need to be very much focused on how to improve that data quality and availability as we move forward. We’ve got to start the journey somewhere, acknowledging the constraints we’ve got at the moment, but working to address them.”
Hill also acknowledges the cost and resource concerns raised by some schemes, but says he expects both to fall over time as processes evolve and procedures are streamlined.
TPR is required to fine schemes where a report has not been published or is published late, but Hill says it would “only fine where we really have no choice but to fine”. He adds that he has seen no indication that any of the 23 schemes in the first wave would end up being fined for not publishing.
Things can only get better?
Some of the issues schemes are facing are unique to the first few years of reporting. Those that have already set net-zero targets and begun thinking about decarbonisation will find it easier to begin the process – but, as Barron notes, starting from scratch is “quite an undertaking”.
However, once a scheme has reported for the first time, much of the effort can be carried over to the next year. “A lot of the sections of the report don’t necessarily change year on year,” says Lindmeier.
As more schemes report and other market participants are brought under the regulations, it also seems likely that issues around data will resolve and some of the complexities will be ironed out.
Lindmeier does not expect the issues to be resolved by next year, “but we’re getting there” – especially in carbon-intensive sectors and those with the most material Scope 3 emissions. Russell also expects data quality to improve over time.
While difficult, the process is nonetheless worthwhile for both Lindmeier and Barron. For Lindmeier, one of the key benefits is “understanding what you hold and what your exposure to climate risks across the portfolio”. She adds that the process has also been useful for helping engage Nest’s trustees on climate.
Barron agrees. “We have to do a hell of a lot of work to bring it all together – but we wouldn’t be having these discussions if we didn’t have to do a TCFD report.”
As she notes, however: “It’s the ‘so what’ afterwards that’s really important.”