UK government releases draft TCFD reporting guidance for pension schemes

New guidelines impose scenario analysis and emissions publication requirements

Large UK pension funds will be required to commence climate reporting in line with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) from 2021, according to the latest proposals by the UK government.

A consultation has been kicked off today on plans to require schemes to disclose their carbon footprint and governance structure, and undertake detailed climate scenario analysis.

This is the second consultation on mandatory TCFD-aligned reporting: in August 2020, the Government launched a six-week consultation on its initial proposals, which received 99 responses from pension funds, NGOs and asset managers, including USS, Trades Union Congress and ShareAction.

Initially, the obligations, which will be introduced using powers granted to the Government under the Pension Schemes Bill, will only apply to schemes with more than £5bn in assets, but the threshold will fall to £1bn from October 2022.

Under the current plans, pension scheme trustees will be required to carry out detailed scenario analysis, exploring the effects and implications of various climate scenarios such as a rise in global temperatures or the introduction of a high carbon price. The analysis must include at least two scenarios involving an increase in the global average temperature, one of which must be between 1.5°C and 2°C. 

The analysis would have to be undertaken in the year in which the regulations come into force, and every three years afterwards. Trustees may also have to carry out new analysis in intervening years if more data or scenarios become available, or if there is a significant change to investment or funding strategy. 

The rules also require scheme trustees to calculate an absolute emissions metric and an emissions intensity metric. They will be required to obtain data on scope 1, 2 and 3 emissions, and to publish all scope 3 emissions relating to their investments.

In addition to reporting their emissions, trustees will be required to report either: the net zero targets of portfolio companies, the proportion of investments vulnerable to climate risk or details on the quality of their data.

To ensure that the report receives due prominence, it must be published on a public website free of charge and should also be referenced from schemes’ annual reports.

Schemes who fail to publish a report will be subject to a penalty of up to £50,000, and a penalty of up to £5,000 for individual trustees.

Claire Jones, Head of Responsible Investment at pension consultancy LCP, who contributed to the consultation, said: “The speed at which the Government has developed its proposals to require large pension schemes to take action on climate change demonstrates that it is treating this systemic financial risk with the seriousness it deserves.

“The headline changes that the Department for Work and Pensions has made in response to last year’s consultation suggests that it has struck an appropriate balance between addressing the practical concerns that we and others had identified and setting suitably high expectations for trustees’ climate action.”

Mike Clark, Founder of Ario Advisory, praised the plans, adding: “There will be time to digest what scenario analysis means for strategic risk management and strategic asset allocation, to consider the necessary development of investment consultant, covenant adviser, actuarial and other climate skills, and to assess the greater engagement of beneficiaries with those who steward their savings.” 

The guidelines follow from the Government announcement that it intends to make TCFD-aligned disclosures compulsory across the economy by 2025.

Further consultation on the published drafts will be open until the 10th of March.