As noted within the consultation response, these measures will see the UK become the first G7 country in which trustees of pension schemes are required by regulations to consider, assess and report on the financial risks of climate change within their portfolios. These regulations sit within the wider context of the UK Government writing the world’s most ambitious climate change target into law, with the goal of reducing emissions by 78% of 1990 levels by 2035, and also form part of the Government’s private finance strategy ahead of COP26 to be held in Glasgow in November 2021. The Government has also announced its expectation that TCFD-aligned disclosures will become mandatory across the economy by 2025. A significant proportion of these requirements are expected to be in place by 2023.

With the DWP now set to legislate this Summer, trustees, particularly those of schemes within the first wave of reporting, are expected to focus on implementing these measures.  Having a clear plan for action is imperative.  Experience already suggests that building a clear understanding is critical and that a focus on key decisions, at least during the first year of TCFD governance and reporting, will allow a smoother path to implementation.

What changed as a result of the second consultation?

Many of the changes provided either clarification or simplification which we welcome. These changes are as follows:

• The definition of bulk annuity contracts has been clarified in that it does not, for example, require exact matching to benefit payments. Annuity contracts are excluded from the calculation of assets for determining whether or not a scheme is subject to the regulations, but should be included in scenario analysis;
• Where requirements only apply for part of a scheme year, reporting only needs to cover that part of the scheme year;
• Expectations around education have been clarified – trustees need to have sufficient knowledge and understanding to assess both opportunities and risk. 
• Trustees need to have processes in place to ensure that persons undertaking governance activity for the scheme take adequate steps to identify, assess and manage climate related risks and opportunities. They must also ensure that processes in place are integrated into their overall risk management of the scheme;
• Scenario analysis must be undertaken in the first year the regulations apply, but can be undertaken before the date that the regulations apply – the same applies to the calculation of metrics. Once undertaken, scenario analysis must be repeated at least every three years.
• Scope 3 emissions data does not need to be collected in the first year of the requirements, but applies from the second year onwards; and
• Target setting must take place during the first year that the regulations apply, not at the start of the period, and performance must be measured within each scheme year.