Covenant climate disclosures: How much should be confidential?

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Covenant specialists have urged the Pensions Regulator to clarify to what extent trustees and employers can withhold information when reporting on climate risks from a covenant perspective. TPR’s consultation on guidance around climate-related governance and reporting closed on Tuesday. 
The Employer Covenant Practitioners Association has said greater clarification as to how trustees and sponsors should report on climate-related risks and opportunities from a covenant perspective is critical in ensuring that such risk is being managed in an integrated way.   

‘Public disclosure would be strongly resisted’ 

In its response to the consultation, the ECPA said it would be helpful to understand the extent to which the regulator expects employers to be able to limit the amount of information that they provide to trustees on the grounds of confidentiality given that trustees’ reports must by law be publicly available.  
“For some employers the impact of climate-related risks and opportunities on their covenant could be significant and require considerable investment to be made or significant strategic decisions to be taken. The commercial sensitivities around these matters could be such that public disclosure would be strongly resisted,” said ECPA chair Andy Palmer. 
Palmer added that he would welcome it if TPR could reiterate that the targets that trustees set should be scheme-specific and not conflict with trustees’ fiduciary duty or the policies stated in the Statement of Investment Principles.  
“An excessive focus on portfolio optimisation to meet targets at the expense of scheme objectives could be contrary to trustees’ fiduciary duty under trust law. There is no expectation that trustees should set targets which require them to divest or invest in a given way, and the targets are not legally binding,” he said. 
The Pensions and Lifetime Savings Association also highlighted covenant risk as one area where the industry would like to see additional guidance. 
Joe Dabrowski, deputy director policy at the PLSA, said that before finalising the guidance there are several areas which would benefit from further refinement or development, “in particular, further clarification of reporting expectations across different asset classes – where data availability may be highly varied – guidance on use of qualitative scenario analysis, the impact of climate issues on covenant risk, and also ensuring that all elements of the information sought and the format in which it can be received can be used purposefully and understood by regulators and scheme members alike".

A spokesperson for the Pensions Regulator said: “We are grateful to trustees and advisers for the important part they played in helping [shape] our guidance by responding to our consultation and taking part in our series of stakeholder engagement events."

The spokesperson added: “We will be reviewing the written responses to our consultation, alongside the feedback from external events before publishing the final guidance before the end of November. We are also planning further guidance on how trustees and their advisers may consider climate-related risks and opportunities as part of their covenant assessment.”  

Where should the confidentiality line be when it comes to covenant-related climate disclosures? 

Andy Palmer
Joe Dabrowski
Karina Brookes
Richard Farr