In this edition we focus on why, how and to what extent climate change risk management has been dialled up by recent legislation, regulation and global collaborations and why this matters.
Moving the climate risk management agenda forward
“The global firepower of institutional investors must be harnessed and directed towards a net zero future… I greatly welcome those investors who are already… align[ing] their future returns with the future of our planet.”
HRH Prince of Wales,
Foreword, IIGCC Net Zero Investment Framework Implementation Guide, March 2021.1
The Pensions Scheme Act 2021, although a long time coming, was worth the wait – not least given the many measures it contains to further enhance the security of scheme members’ benefits and retirement outcomes. Central to these objectives was mandating the recent DWP (Department of Work and Pensions) initiative to improve the assessment and reporting of climate risks for the UK’s most impactful trust-based pension schemes.
Fully endorsed by The Pensions Regulator (TPR) in its recently published climate change strategy,2 and with a phased roll out, starting on 1 October 2021, the measures will ultimately apply to defined benefit (DB) schemes
with £1bn+ of assets, all master trusts and collective defined contribution (CDC) schemes.3 Encapsulating the setting of strategic goals, scenario planning, risk assessment and performance measurement, Trustees
of those schemes captured under the legislation will need to report on the total Greenhouse Gas (GHG) emissions (“absolute emissions”) of their asset portfolios, the total CO2 emissions per unit of currency invested
(“emissions intensity”), and an additional climate metric, unconnected to the previous two4 – assessing each at least annually and conducting a scenario analysis in year one and then at least triennially.
Wield a stick or dangle a carrot to enact change?
The IIGCC Net Zero Investment Framework 1.0
Why does this matter?
In such a scenario, this would leave those pension schemes that fail to act, exposed to unacceptably high and largely unmanageable risks – risks that should be identified, evaluated and managed far in advance of their
impact materialising. Indeed, there is a very real risk of financial assets with either prominent underlying climate risks or strong climate-friendly credentials being materially repriced far in advance of company balance sheets, physical assets and the real economy being impacted. Therefore, if these asset repricing risks, which might otherwise compromise the ability to generate long-run sustainable returns, are to be properly managed, there is a potential first mover advantage to pension funds of overcoming the myopia surrounding climate change risk
management. Ultimately, we need to create a UK pensions system that has resilience to both transition and physical climate risks. While legislation and regulation go some way to achieving this, collaborative asset manager- and asset owner-inspired measures are ultimately needed to square the climate risk management circle