Trustees will be required to stress test their investment portfolios against a range of climate-related risks, according to provisional guidance launched by the government.
An amendment to the pensions bill will give the government the power to mandate schemes to report on the potential impact of climate change and the low carbon transition on their assets and investment strategy, in line with the Taskforce on Climate-related Financial Disclosures, the Department of Work and Pensions (DWP) confirmed in a consultation.
The draft guide has been drawn up by The Pensions Climate Risk Industry Group (PCRIG) a group set up last summer by the DWP, The Pensions Regulator and other pension representatives.
It is split into three sections – the threats of climate change to schemes’ portfolios and corresponding regulation, how trustees should consider those risks when setting investment strategies, and reporting and technical considerations such as setting targets and metrics to measure and manage climate-related risks and exposure.
David Fairs, executive director of regulatory policy, analysis and advice at TPR, said: “Climate change is a core financial risk which pensions trustees must consider when setting out their investment strategy.”
“That’s why PCRIG’s guide is so important as it will help trustees demonstrate how they are taking this and other financially material considerations into account over the lifespan of their investments,” he added.
Trustees should start getting the wheels in motion now by understanding where their exposure to climate-related financial risks lie through climate scenario analysis and stress testing, said Mercer European head of responsible investment, Kate Brett.
“Schemes should be considering alignment to the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), including carbon footprinting their portfolios and challenging their investment managers on their climate implementation policies and approach to stewardship,” she said.