Trustees have power to impact climate change, says TPR

“A landscape of resilient pension schemes that protects savers from climate risk is entirely within our reach,” The Pensions Regulator’s (TPR) executive director of regulatory policy has claimed.

In a blog post penned by David Fairs, he shared that there is growing pressure for the pensions industry to play its part in the transition to a net zero economy.

This has stepped up now that from October, larger schemes with assets under management of £5bn or more will have new duties on the governance and reporting of climate-related risk and opportunities.

From 2022, these will be joined by schemes with assets under management of £1bn.

However, Fairs added that by the end of 2023 he expects that “81% of memberships will be in schemes which must comply with these duties,” while smaller schemes will also need to follow suit.

Impact of climate change

According to Fairs, climate change poses financially material risks to sponsors of DB schemes, to the value of funds and their investments, but also a risk to economic stability and the survival of the planet.

“The impacts of climate change are that stark,” he said.

He pointed out that the onus falls onto trustees to set out new policies on how financially material considerations, such as climate change, are taken into account in the "selection, retention and realisation of pension scheme investments”.

Even when trustees feel their advisers and asset managers are doing a satisfactory job regards climate-related risks, Fairs believes that trustees have a duty to monitor whether their expectations are being met.

“Trustees should challenge asset managers and advisers to improve their processes where appropriate,” he explained.

“Ultimately, if a scheme’s advisers do not sufficiently consider the risk and opportunities from climate change trustees can vote with their feet by re-tendering with mandated climate-related criteria or by appointing specialists.”

Paying more attention to climate change

Previous research from XPS Pensions Group that surveyed 200 defined benefit trustees and professionals, found that less than half believed their scheme’s environmental, social and governance (ESG) policies reflected their preferred approach to sustainable investment.

Meanwhile, 78% stated that they wanted to monitor the activity of investment managers beyond minimum compliance checks to avoid any greenwashing – the act of misrepresenting a product, service or investment, to make it appear more sustainable than it actually is.

Commenting on this Fairs said: “Applying pressure on investment managers to pay more attention to climate change in the building of portfolios and investment selection should drive those looking to attract investment to accelerate their plans to make their business more sustainable.”

Stewardship code

Fairs went on to explain that “where trustees demand, supply should follow”. He explained that a greater emphasis on stewardship, with defined goals would help to improve “long-term value and minimise risk from factors such as climate change”.

He noted that trustees should be clear with their investment managers then just asking them to do ESG stewardship, adding that a stewardship strategy is essential.

He concluded: “Climate change has the potential to be the biggest threat to the stability of the systems on which pension savers depend for access to their savings at the end of their working lives. But that doesn’t mean we are powerless in the face of that threat.”