“The best time to plant a tree was 20 years ago, the next best time is now” Chinese Proverb
Our recent survey1 has found an urgent need for schemes over £1bn to take action on climate risks. New reporting requirements developed by the Task Force on Climate-related Financial Disclosures (TCFD) for these schemes came into force on 1 October 2022. The largest schemes, with assets in excess of £5bn, needed to comply a year earlier.
Although preparatory work, including training and engagement with investment managers, has started, significant activity is needed in the coming months to ensure compliance for this second wave of schemes. For instance, only around a quarter of these schemes have integrated climate considerations into ongoing decision making and fewer than a quarter have chosen a climate-related “target”. Where one has been selected, generally by the largest schemes, a target related to emissions intensity (e.g. carbon footprint) seems to be the most popular choice and adopted for around half of such schemes.
We anticipate that schemes that give themselves more time to consider the issues will be far more likely to be able to take meaningful action that improves outcomes for members, and indeed for the planet, rather than simply complying with the letter of the requirements.
Trustee boards who have not scheduled in time to make progress on these issues as part of their autumn 2022 meetings or where this has been disrupted as a result of wider market turmoil will need to find time in their busy agendas in Q1 2023 to drive this forward.
Given both the financial and reputational aspects of managing climate risk, an increasing number of sponsoring employers may become involved. In our survey, only one-third of sponsors of second-wave schemes had, so far, been involved in the process, compared with two-thirds of those sponsoring schemes in the first wave. Early engagement with corporate decision-makers could help Trustee boards manage discussions and reduce the risk of delays or unnecessary rework if the sponsor were to intervene late in the process.
It is not only the £1bn+ schemes that should be taking action. The Pensions Regulator’s draft single Code of Practice includes requirements for all schemes2 to consider the effects of climate change and to maintain a process for identifying and assessing climate-related risks and opportunities. Further, irrespective of the legislative requirements, if some schemes take action to manage the impact of climate change and take advantage of the opportunities available, might those that are less proactive be left behind and suffer?
More information on the TCFD requirements and lessons from the early adopters – as well as broader information on the risks and opportunities for pension schemes associated with climate change – can be found in this WTW report: Climate Change: Risks and Opportunities for Pension Schemes.
1. The survey results cover WTW consultants’ understanding of actions taken by 50+ schemes impacted by the Task Force on Climate-related Financial Disclosures (TCFD).
2. Schemes with more than 100 members
