On the go: The Pensions Regulator has updated its guidance on climate-related risk requirements to include mention of the “portfolio alignment metric”, which affected schemes have had to provide since October 1.

The overall package of regulations has had a phased introduction, initially applying to trustees of authorised master trusts and of large schemes with more than £5bn in assets. 

These have had to compile reports since October 2021, while from October 2022 the bracket has widened to include schemes with relevant assets of more than £1bn — while the Department for Work and Pensions is still considering whether to apply the requirements to smaller schemes in 2023.

The regulations are being amended to mandate that all trustees in scope will have to report on a portfolio alignment metric for any scheme year ending after October 1 2022, which the updated guidance references.

The metric itself gives the alignment of the scheme’s assets to the Paris Agreement target of limiting global warming to 1.5C above pre-industrial levels. 

TPR has the power to levy compliance and penalty notices for recalcitrant schemes, and fines of up to £50,000.

David Fairs, the watchdog’s executive director of regulatory policy, analysis and advice, said: “Climate change and the transition to net zero has the potential to cause material financial consequences for pensions schemes and, ultimately, savers’ retirements.

“Trustees are not being asked to take action to stop climate change, but they must be ready to protect savers’ pensions from the material financial risks it poses, and to take advantage of opportunities from a global pivot towards low-carbon economies. 

“This new metric should help them, and their members, understand and quantify potential risks to scheme investments arising from government actions taken to meet Paris Agreement goals.”

Fairs clarified that trustees are being asked to apply the new metric “as far as they are able”, which he said was an acknowledgement of the fact “that there may be limits to available data”.

“However, trustees should explain the reasons for any data gaps in the report and set out a plan for improvement. As the investment industry adapts to the new data capture and reporting requirements, more information should become available over time,” he continued.

Concerns have been raised previously about trustees’ lack of familiarity with climate-related terminology, and a lack of quality and consistency in data.

Fairs stressed that trustees “do not need to be climate change experts”, but that they should “have sufficient knowledge and understanding to be able to identify, assess and manage climate-related risks and opportunities for their scheme”.

He accepted that “this may be challenging for some”, which is why TPR has produced its guidance, “including an illustrative example charting how trustees of a fictitious pension scheme might approach meeting the requirements of the regulations, including the new portfolio alignment metric”.

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