The latest blog by the Pensions Regulator discusses what trustees can do to drive change following reports criticising the climate scenario analysis used by pension schemes.
These climate scenarios have been criticised in recent months – not least by Nicola Parish, the TPR’s executive director of frontline regulation. But research from the Institute and Faculty of Actuaries, the DC Investment Forum and Carbon Tracker, has also highlighted the limitations of current models and scenario analysis.“They rightly question the validity of some published outcomes, which appear to seriously underestimate the financial risk from climate change and are at odds with the established earth and climate science,” said Hill.“But this doesn’t have to be seen as a bad thing, it’s a timely opportunity to take stock and look ahead.”Trustees need effective tools to adequately identify and respond to climate-related risks and opportunities to avoid savers being lest exposed, said Hill, and added they must do more – they must also act.“It’s essential trustees appreciate this reality and feel confident to question and challenge their advisers and the output from climate scenario analysis. Is the financial analysis consistent with the science? What are the implications of the narratives behind the scenarios? How are tipping points and other non-linear changes accounted for?”TPR has specific expectations of trustees, added Hill, including:
having an appropriate level of knowledge and understanding of climate issues;
undertaking regular training;
regularly reviewing the climate-related capabilities of service providers;
being able to understand the narratives underlying their climate scenarios;
be able to broadly rationalise the outputs from those scenarios for their scheme;
considering with advisers the use of stress testing and tail risk analysis.
