DWP’s climate risk action for pensions ‘a positive start’

The DWP's response to last year's Taking Action on Climate Risk consultation proposes pension schemes publish TCFD reports

The Department for Work and Pensions’ (DWP) confirmation that workplace pension schemes will be required to take action on climate risks has been welcomed by the responsible investment industry.

Last week, the DWP published the outcome of its consultation Taking Action on Climate Risk in which it said from 1 October 2021, occupational pension schemes with more than £5bn in assets will need to track climate risks and set targets. They must also publish a Taskforce on Climate-related Financial Disclosures (TCFD) report, which should be linked in their annual report and accounts by the end of 2022.

Guy Opperman, minister for pensions and financial inclusion, said: “Climate change is a major systemic financial risk and threat to the long-term sustainability of UK private pensions. With almost £2trn in assets under management, all pension schemes are exposed to climate-related risks and I am committed to ensuring trustees do everything they can to limit this risk to their members’ future retirement income.”

Claire Jones, head of responsible investment at LCP, and ESG Clarity editorial panellist, has welcomed the development. “The speed at which the government has developed its proposals to require large pension schemes to take action on climate change demonstrates that it is treating this systemic financial risk with the seriousness it deserves,” she said.  

“The headline changes that DWP has made in response to last year’s consultation suggests it has struck an appropriate balance between addressing the practical concerns we and others had identified and setting suitably high expectations for trustees’ climate action. 

“For larger schemes, today’s publication is confirmation of what they knew was coming down the tracks: that by 1 October 2021 (or 1 October 2022 depending on their size), they will need to have a system in place to identify, assess and manage climate-related risks and opportunities and be preparing to publish annual TCFD reports. Although some of the technical details are still subject to consultation, there is now sufficient certainty that they can move ahead with confidence in getting ready to meet these new requirements.”

See also: – Pension schemes and members: Finding the common ground on ESG

She added trustees of smaller schemes can look to larger schemes as indicators of best practice. “Although the new requirements do not yet apply to them, the government made it clear last August that all trustees are expected to take action to address climate risk – whatever their scheme size – in line with their fiduciary duties.”

Rachel Haworth, UK policy manager at ShareAction, said the DWP’s guidance was a positive start.

“Without mandatory TCFD reporting, financial markets will continue to fail to price in the risks posed by the climate crisis. DWP has broken new and important ground in developing detailed regulations and guidance in this area,” she said.  

“This work paved the way for the UK government’s subsequent announcement of its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023.”

She added: “While the proof of the pudding is in the eating, the proposed regulatory framework and guidance seems well-considered and fit for purpose. We hope new requirements for trustee knowledge and understanding will equip trustees to feel confident in understanding and challenging advisers on climate-related information. It was encouraging to see the broad support among respondents for schemes’ resilience to be tested against three scenarios (an ‘orderly’ transition to 2°C, a ‘disorderly’ transition to 2°C, and no transition) and that this approach was reflected in the draft statutory guidance.

“This is a positive start, ensuring financial markets are pricing in climate-related financial risks. However, climate change is a systemic challenge that individual investors will struggle to manage on a portfolio-by-portfolio basis. Rather, economic transformation is required. DWP states it has explored the methodologies available for measuring the climate impacts of pension fund portfolios but concluded that more work is required before these can be implemented. We call on DWP and the pensions industry to accelerate this work in line with the urgency and scale of the climate crisis.”

The DWP has now opened a new consultation on its response and guidance, which will close on 10 March 2021.


Natasha Turner

Natasha is global editor at ESG Clarity, part of Mark Allen Financial, and has been a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the...