26 October 2021

Enhanced climate change reporting requirements coming soon

Hot on the heels of the new climate change requirements which came into force on 1 October, the Government has published a consultation on proposed amendments to those requirements. The changes will require trustees of larger occupational pension schemes and authorised master trusts to measure and report on the extent to which their investments are aligned with the Paris Agreement goal of pursuing efforts to limit the global average temperature increase to 1.5°C above pre-industrial levels.

The proposals shouldn’t come as a surprise to trustees – this is a rapidly evolving area and earlier consultations have highlighted that further change is likely. However, the Government rightly recognises that a lot is being asked of occupational pension schemes, which must now get up to speed with a further layer of regulation.

Measuring and reporting Paris alignment

Under the current requirements, trustees in scope are required to calculate and disclose three metrics: one which gives the total greenhouse gas emissions of the scheme’s assets (an “absolute emissions metric”), one which gives the total greenhouse gas emissions of the scheme’s assets per unit of currency (an “emissions intensity metric”) and one other which relates to climate change (an “additional climate change metric”). The proposal is that trustees will be required to calculate and disclose a fourth metric, which gives the alignment of the scheme’s assets with the climate change goal of limiting the increase in the global average temperature to 1.5°C above pre-industrial levels (a “portfolio alignment metric”).

Several points are worth highlighting:

  • The Government has published proposed amendments to the statutory guidance, which includes much of the detail underpinning the climate change requirements and to which trustees must have regard. The amended guidance covers the types of portfolio alignment metrics trustees should calculate and report, as well as the level of granularity (portfolio, section, fund, asset class) at which the selected metrics should be calculated and reported.
  • As with the existing metrics requirements, trustees must calculate the portfolio alignment metric “as far as they are able”. This recognises that there may be gaps in the data trustees are able to obtain for these purposes. The amended statutory guidance includes information on the management and reporting of data gaps.
  • Trustees already in scope may choose a portfolio alignment metric as their additional climate change metric for the period before the new requirements come into force. However, once the new requirements are in force, trustees will need to select a different additional climate change metric to remain compliant. The updated statutory guidance includes an extended list of additional climate change metrics which trustees can choose, bringing the guidance in line with updated Task Force on Climate-related Financial Disclosures (TCFD) guidance.
  • The consultation reiterates that trustees retain complete primacy over any investment decisions they make. The requirements are about improving scheme governance and disclosures in relation to the effects of climate change.
Stewardship

The Government is also consulting on draft guidance on the Statement of Investment Principles (SIP) and the Implementation Statement (IS). The draft guidance relating to the SIP will be non-statutory “best practice” guidance, but the draft guidance in relation to the IS will be statutory guidance to which trustees must have regard. The guidance focuses on the areas where existing policies and reporting are perceived by the Government to be weakest – stewardship (specifically, voting and engagement) and, to a lesser extent, consideration of financially material ESG factors and non-financial factors.

Next steps

The consultation closes on 6 January 2022 and the Paris alignment requirements are expected to come into force for all schemes in scope on 1 October 2022. This means they will apply immediately to schemes with £1 billion or more in assets when the climate change requirements first apply to them from 1 October 2022 (as well as applying to schemes with £5 billion or more in assets and authorised master trusts from that date).

For more information, please speak to your usual Linklaters contact.