Claire Jones: The upcoming review is a great opportunity for the DWP to simplify the TCFD requirements
The Department for Work and Pensions DWP) must adapt the TCFD climate change governance and reporting regulations to ensure that they are more effective in helping trustees to practically manage and reduce climate-related risks for members, Lane Clark & Peacock (LCP) says.
The consultant said yesterday (1 October) marked the second anniversary of the TCFD requirements coming into force for the largest occupational pension schemes in the UK.
It said the DWP is set to review the requirements by the end of this year.
LCP said that, while the rules have increased focus on climate change and improved governance around the issue, there were concerns there had been "limited action" when it comes to scheme management.
In a blog published today, LCP partner and head of responsible investment Claire Jones argued that the DWP needed to place greater emphasis on trustees managing climate-related risks and opportunities, and to simplify the disclosures they are required to make.
In addition, she said the DWP should encourage greater consideration of the funding and covenant aspects - urging The Pensions Regulator to embed climate considerations into its upcoming funding code and covenant guidance for defined benefit schemes.
LCP also calls on the DWP to rethink its approach for metrics, so trustees can concentrate on the aspects that are most useful for managing the climate-related risks and opportunities to their scheme - noting some of the four required metrics are "not very useful ones for trustees", with the focus being on greenhouse gas emissions data that is backwards-looking and a fairly poor proxy for climate risk exposure. It said a lot of time is spent collecting data for less important mandates, which could be better used elsewhere.
The consultant said key improvements that could be made include:
- Changing the requirements for specific types of metrics from mandatory to recommended, so they can be updated more easily as market practice evolves
- Recasting the key aspects as principles and position the rest of the material as helpful information rather than recommendations (ie things trustees "could" rather than "should" do)
- Excluding gilts, liability-driven investment (LDI) and buy-ins from the metrics requirements because they don't provide useful insights regarding climate risk exposure
- Permitting trustees to focus on the most material mandates and the relevant metrics for those mandates
- As the metrics improve, encouraging trustees to make greater use of forward-looking metrics, climate solutions metrics and physical risk metrics.
Jones said: "Of course it is still early days and, hopefully, as new processes bed in, the balance of effort will naturally shift from governance and reporting to action. However, given the urgency of improving climate risk management, the requirements should be amended to encourage that shift.
"The upcoming review is a great opportunity for the DWP to simplify the TCFD requirements and make sure they are working as effectively as they can.
"In the meantime, I urge schemes to remember that the underlying purpose of the regulations is to improve the management of climate-related risks and opportunities on behalf of their members - and focus on that."
