Last year, the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021, SI 2021/839 and Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021, SI 2021/857 came into force. The purpose of these regulations is to ensure trustees of larger schemes are taking proper account of climate change when making decisions about their scheme, including the risks and opportunities that climate change may bring. Schemes in scope originally included only schemes with relevant assets of at least £5bn, authorised master trusts and CDC Schemes. Since 1 October 2022, the obligation also applies to schemes with relevant assets of at least £1bn.

Trustees of schemes in scope must have appropriate governance arrangements in place to manage climate-related risks. These arrangements should be reported on each year and a publicly available report needs to be published within seven months of a scheme’s year end date. The report should detail how the trustees have complied with their obligations, and if applicable, where they have deviated from statutory guidance published by the Department for Work and Pensions (DWP) that trustees must have regard to. TPR also published guidance on how trustees can comply with their duties.

TPR updated its guidance in September 2022 to take account of the further obligation for trustees in relation to climate-reporting that came into force on 1 October 2022. This new obligation is a requirement to measure and report on another climate-related metric known as the ‘portfolio alignment metric’ (explained further below).

What is the new requirement and what are the key updates or changes to the guidance?

Since 1 October 2022, trustees are required to calculate and report on what is known as a ‘portfolio alignment metric’ under SI 2022/733, reg 2. This metric will demonstrate scheme asset alignment with the Paris Agreement goal of limiting global warming to 1.5°C above pre-industrial levels.

Trustees have flexibility to choose the type of portfolio alignment metric they consider most appropriate. TPR’s guidance contains examples referencing three types of portfolio alignment metrics: binary target measurements, benchmark performance models or implied temperature rise. Trustees should, in consultation with their investment advisers, decide which type of metric they will calculate and report on.

For certain activities, the legislation says trustees should carry them out ‘as far as they are able’. In particular for metrics, that includes the following activities:

• obtain and use data to calculate the trustees’ selected metrics
• use the metric to identify and assess the climate-related risks and opportunities which are relevant to the scheme

‘As far as they are able’ is explained in more detail in DWP statutory guidance. This principle is meant to recognise that certain data may be expensive to collect or associated analysis complex to carry out.

TPR’s guidance doesn’t add much more on the new portfolio alignment metric itself and instead cross-refers to the DWP’s guidance which is more detailed and is statutory guidance.

What are the implications for pension schemes and trustees?

For trustees in scope, they will have to publish a report outlining how they have complied with governance requirements to manage climate-related risks, including the new portfolio alignment metric, within seven months of the next scheme year end after 1 October 2022.

This may seem some time away, however, for most schemes, the report will cover the current scheme year so there is still time to consider what steps can be made now to make the eventual reporting easier and have more of an impact, ie talking to investment advisers and managers about what steps are required to report.

Some large schemes are already reporting on a portfolio alignment metric as their ‘additional metric’ so those trustees will need to choose a new ‘additional’ metric as required under the legislation.

For some schemes, this additional metric will not require as much extra work for example if schemes have net zero ambitions, they may be carrying out similar calculations already even if not formally reporting on them currently.

What happens next?

Trustees of schemes within scope should begin having conversations with their investment advisers on the new portfolio alignment metric. For trustees of schemes newly in scope as of 1 October 2022 (as phased in by the regulations published in 2021), conversations will need to be had about the other three metrics they are required to calculate and the other obligations they are newly in scope for.

Although only larger schemes are currently in scope, the DWP will consider next year whether to extend these obligations to smaller schemes from late 2024/early 2025. The DWP has said before that it wants to balance the value for members verses the costs of complying for smaller schemes.

Rhiannon’s article was first published in Lexis PSL, here (behind a paywall).