Pension schemes need to integrate broader ESG reporting into core governance operations to “ensure they are fit for the future”.
Trustees should seek to be early adopters of reporting on material social and nature-related risks as new regulations are on the horizon, The Pensions Regulator (TPR) has said.
In a blog post, TPR’s climate and sustainability lead Mark Hill said trustees should consider “wider environmental, social and governance (ESG) risks and opportunities”, now that climate-related reporting was part of their “business as usual” processes.
The international Taskforce on Nature-related Financial Disclosures (TNFD), launched in 2021, published its first reporting framework in September last year and in November added an illustrative reporting template integrating nature-related and climate-related risks.
Its intention is to build on the work of the Task Force on Climate-related Financial Disclosures (TCFD), which has become the basis for most pension funds’ climate change investment and reporting strategies.
TPR’s Hill explained: “Trustees should already take into account financially material considerations over the appropriate time span of their investments. This is fundamental to delivering good saver outcomes.”
He added that, while there were “no mandatory requirements” to adopt recommendations from the TNFD or other UK bodies, “trustees would do well to familiarise themselves with them”.
Specifically, on top of the TNFD’s work, Hill urged trustees to assess the recent work of the UK’s Transition Plan Taskforce – set up in 2022 to establish a “gold standard for private sector climate transition plans” – and the Taskforce on Social Factors. The latter organisation published a guide for pension schemes in October designed to help trustees incorporate material social factors into their investment strategies.
The importance of reporting
Hill said the first series of climate reports from pension funds “show what can be achieved with the right framework, guidance and regulation”, on top of increasing awareness and better understanding of the risks and opportunities affecting pension funds.
“We have heard some say that reporting may get in the way of decision making and action,” Hill continued. “But the disclosures required should be the output of the strategic decisions that trustees are making.”
TPR intends to use improving and broadening disclosures to identify emerging risks “and constructively check and challenge decision-making so that savers’ interests are really being met”, Hill said.
He added: “The goal is not disclosure for disclosure’s sake but to encourage genuine change in how schemes operate. To see trustees, working with skilled advisers and embracing best practice, focussed on maximising the upside opportunities and mitigating the downside risks-that climate change presents.”
Through effective reporting, trustees can plan properly for the long term and identify and mitigate risks, as well as seize opportunities when they arise, Hill explained. It will also help them engage with government and regulators about expected future consultations and shape future requirements to ensure they reflect the needs of pension schemes and their members.
“Evolving reporting to include nature and social factors, supported by transition plans and developments in TCFD reporting practices, may seem daunting,” Hill acknowledged. “However, it should be possible by incrementally building on the foundations of TCFD.”
How schemes are engaging
Two local authority pools – Brunel Pension Partnership and London CIV – are early adopters of the TNFD’s framework, with both organisations pledging to begin nature-related reporting from the 2025 financial year.
Asset managers including Federated Hermes, Fidelity, Schroders, Impax and Montanaro have also signed up to the taskforce’s reporting framework. TPR’s Hill encouraged trustees to consider also becoming early adopters or incorporating nature-related considerations into their statements of investment principles.
The Church of England Pensions Board, the Pension Protection Fund, Railpen and the Local Authority Pension Fund Forum have all participated in the Taskforce on Social Factors’ work, alongside representatives from industry associations, government departments and regulators.
Hill highlighted the importance of collaboration between schemes to share knowledge and best practice, particularly around scenario analysis. He cited the work of organisations such as the Climate Financial Risk Forum and the Network of Central Banks and Supervisors for Greening the Financial System as key examples.
“ESG and related reporting is a significant challenge for trustees, but failure to account for climate-related risks and opportunities and, where material, nature and social factors, puts savers at risk,” Hill concluded. “It’s time schemes integrated ESG reporting into core governance operations to ensure they are fit for the future.”