TCFD regs and guidance: DWP offers easements around timing and DC defaults
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The Department for Work and Pensions has published guidance on reporting in line with the Task Force on Climate-related Financial Disclosures, including on trustee knowledge and understanding. It has also issued its final regulations on TCFD alignment offering some easements in response to industry.
The DWP guidance published on Tuesday as the investment chain moves to mandatory disclosure. Large pension funds and master trusts will be obliged to produce a TCFD report from October this year, and the government has now also issued final regulations for this, following a consultation in January.
Last November, chancellor Rishi Sunak outlined a roadmap for the UK economy on moving to climate disclosures, expecting that 85% of occupational schemes will be covered by relevant regulation in 2025. The Financial Conduct Authority in December issued rules on TCFD alignment for premium listed companies, and plans to extend this to asset managers, life insurers and FCA-regulated pension schemes but has not done so as yet.
Opperman: Climate and social are linked
The pension fund regulations published today and flowing from the Pension Schemes Act 2021 contain some easements in comparison with the proposals in the consultation.
"There has of course been some disagreement with certain elements of our proposed approach, and many stakeholders offered constructive feedback as to how it could be improved. Government has listened and made changes to our policy to ensure that the regulatory burden is reasonable and proportionate whilst still retaining the wider benefits of the measures," minister Guy Opperman commented on the changes.
However, "the direction is set, and we will legislate this summer. Trustees should now focus on implementing these world-leading measures," he added.
Opperman also noted that industry might have misunderstood his push to improve climate risk management as an exclusive focus on the environment and was keen to highlight a recent consultation on social factors.
"Whilst I make no apologies for focusing on environmental concerns over the past year – climate change will be the most vital challenge of the current time – it has never been my intention that climate change should be trustees’ sole Environmental, Social, and Governance (ESG) consideration, not least because action on climate change is often linked to action on wider social factors," he said.
"Indeed, stewardship in particular will be key to ensuring that pension schemes effectively manage the transition to a low carbon economy," Opperman noted.
A working group set up by the DWP, the Taskforce on Pension Scheme Voting Implementation, will report back later this year with recommendations. "Taking them into account we will be considering steps needed to improve the current system," he said.
Period of grace for scope 3 emissions data
There are some easements in the new TCFD alignment regulations compared with what was proposed in January, including an extra year before schemes have to start reporting on so-called scope 3 emissions, which relate to purchased goods and services, business travel and employee commuting, and use of sold products among others.
"This is one of the aspects of the original proposals which many trustees were concerned might be particularly challenging, so an extra year for this will, I’m sure, be welcomed," said Sackers partner Stuart O’Brien, even though he admitted that “the question remains as to how good that data is going to be” one year later.
The DWP has also made changes about the threshold from which trustees have to carry out scenario analysis for defined contribution defaults. The statutory guidance now introduces a floor of £100m or 10% of the assets providing DC benefits, including additional voluntary contributions. Previously, many more sections that are technically default funds but not thought of as such would have been in scope, as the threshold was originally set at 250 members.
“We were finding quite a lot of our clients had more DC defaults than they wanted to do scenario analysis for,” as it is not uncommon for them to have four or five default funds through previous mapping exercises, said O'Brien. The change “seems to me to be a change for the better”, he added.
FCA is yet to produce rules for asset managers
Whilst trustees will now need to publish reports, the FCA has not yet created rules for asset managers on TCFD alignment, who will provide much of the data that schemes need to rely on for their own reporting.
O'Brien said some managers are “better than others” in trying to make the data available already. “By and large data is coming through. The challenge area is always scope 3 reporting,” he said.
How closely the FCA and DWP regulations tie up “remains to be seen”, said Claire Jones, a partner at consultancy LCP.
However, “we are finding that managers are quite cooperative in terms of responding to requests for data. The issue is that they don’t always have the information to hand, as they have to set up systems and databases themselves,” she said. However, the ‘as far as they are able to’ wording of the DWP regulations will allow trustees to explain this in the TCFD report.
Where managers can't provide data, trustees would be expected to engage with a manager to encourage better data. A refusal to provide this could be “indicative of a wider issue” about how the manager deals with climate risk, said Jones.
‘As far as they are able’
The new statutory guidance emphasises the wording of ‘as far as they are able’, which is used in relation to undertaking scenario analysis, obtaining emissions data at different levels in the production and supply chain, and measure performance of the scheme against their chosen metrics among others.
The ‘as far as they are able’ requirements are worded this way because they “recognise that there may be gaps in the data trustees are able to obtain about their scheme assets for the purposes of carrying out scenario analysis or calculating metrics”, and that schemes could find it challenging to quantify climate risks on assets such as some sovereign bonds, insurance contracts, asset-backed contribution structures and derivatives, according to the department.
These challenges could include the expense associated with obtaining such data; but where trustees decide that the data is ‘unobtainable’ for cost reasons, “a robust justification for doing so should be set out in their TCFD report”.
Just where the threshold for ‘too expensive’ lies is going to be the “$64,000 question”, said O’Brien, but pointed out that the area is framed in terms of decisions being ‘reasonable’ and ‘proportionate’.
The guidance also explains that where there are gaps in data, regulations will expect trustees to make additional information requests from companies. If data is available but incomplete, they can choose to use estimates to fill the gaps or qualitative instead of quantitative methods but must always explain their decisions in the TCFD report.
Comms to become a measure of TKU
In its new guidance, the DWP also offers ‘best practice’ for trustee knowledge and understanding, encouraging trustees to have an appropriate degree of knowledge and understanding of climate change.
However it notes that “this understanding need not require a mastery of technical detail” as trustees “will identify experts to do this”.
The reference to "experts" raises the question whether outside expertise is already available in sufficient quantity. Jones believes that “everybody is on a learning curve” but said she was confident that the industry will be able to provide the advice trustees need.
She highlighted that trustees will need to check that advisers have sufficient knowledge about climate as all people involved in the scheme are required to have the necessary expertise.
While trustees and their advisers will need the knowledge to produce a TCFD report, it will be important that members are able to understand it, the DWP stresses.
“Whilst we acknowledge the challenges of producing a TCFD report which is digestible by all beneficiaries, trustees should present their TCFD reports in a way that would allow a reasonably engaged and informed member to be able to interpret and understand trustees’ disclosures, and raise concerns or queries where appropriate,” it notes.
As a minimum, it expects a report to include “a plain English summary which is for members to read and allows them to become easily acquainted with the key findings from the report”, while trustees should not forget to take into account the needs of disabled people.
Jones pointed out that public TCFD reports will be used a way of demonstrating trustee knowledge and understanding.
According to the DWP, “where the content of the disclosures is poor, this could raise concerns to The Pensions Regulator about the trustees’ level of knowledge and understanding”.
Is the DWP's guidance helpful? What would you change?