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Preparing for TCFD: what pension schemes need to do

Responsible investment
Claire Jones Partner and Head of Responsible Investment

In recent months, pension scheme activity on climate change has reached a tipping point. Particularly among larger schemes, this is now a high priority topic.

The main driver is the new mandatory requirements to produce annual TCFD (Taskforce on Climate-related Financial Disclosures) reports. These apply to £5bn+ schemes and master trusts from 1 October this year, to £1bn+ schemes one year later, and may be extended to smaller schemes after that.


The requirements are detailed and extensive, so there is lots for trustees to do, although actions can be phased. There are three deadlines to be aware of:

  • 1 October (2021 or 2022 depending on scheme size/type) – ongoing processes in place, covering governance, strategy and risk management
  • Next scheme year-end following 1 October – periodic activities completed for the first time, namely scenario analysis, metrics and targets
  • 7 months after that scheme year-end – first TCFD report published online.

Many schemes in the first wave will need to ramp up activity over the next few months to ensure they are on track for the 1 October 2021 deadline, whereas schemes in the second wave should be developing a structured plan for the next 12-24 months. It is important to bear in mind that the details of the new requirements are still subject to change, so schemes may need to tweak their approach later in the year. DWP’s consultation on the draft regulations and statutory guidance closed on 10 March, and we are now waiting for the final versions to be laid before Parliament for approval. There will also be TPR guidance later in the year, to help schemes comply with the new requirements.

The requirements themselves are grouped under the TCFD’s four headings: governance; strategy including scenario analysis; risk management; and metrics and targets.


These requirements form the bedrock on which all other activity rests. Trustees are required to put in place processes to ensure that climate-related risks and opportunities are being identified, assessed and managed adequately, with appropriate oversight. Everyone involved should have clear roles and responsibilities, with sufficient resources, knowledge and expertise.

Strategy including scenario analysis

Trustees must identify and assess climate-related risks and opportunities to the scheme, and then factor them into strategic decision-making. This represents a departure for many trustees: much of the focus to date has been on investment managers addressing the risks and opportunities at a granular level. How can trustees factor climate change into investment strategy and (for DB schemes) funding strategy discussions? In my experience, scenario analysis – which trustees are likely to be required to do at least once every three years – is an excellent starting point for these discussions. Top-down scenarios illustrate how the economic landscape may be affected by climate change, so you can explore the implications for asset allocation and journey planning.

Until now, almost all trustee conversations about climate change have been about the assets. Now DB trustees need to think about the liability and covenant impacts too. The latter is particularly important if the employer is in a climate-sensitive industry. How might climate change affect the employer’s ability to support the scheme, particularly over the medium and long term? Does that affect the trustees’ choice of target end state (eg low dependency, consolidator or buy-out) and how quickly they want to get there?

Risk management

This is the crucial stage: actually managing the climate-related risks that trustees have identified is vital, yet DWP’s proposals are surprisingly light on detail. The regulations require the risks to be managed, and for that risk

management to be integrated with the trustees’ processes for managing other risks. The lack of detail probably reflects the scheme-specific nature of the risks and mitigating actions.

Those mitigating actions are likely to focus on the assets, with trustees often relying on their investment managers to manage the risks. The role of the trustees is to provide direction and oversight: firstly deciding on their climate requirements for each mandate (including whether they want a specialist strategy such as low carbon equities); then selecting a manager with suitable climate expertise and processes; and finally ongoing oversight to ensure the manager’s implementation meets expectations and evolves appropriately.

Metrics and targets

Trustees are often most concerned about these requirements, as there are well-known problems with the availability and quality of climate-related data. However, trustees only need to obtain the data for their three chosen metrics annually “as far as they are able” (taking all such steps as are reasonable and proportionate in the particular circumstances). Encouragingly, quality and availability are improving all the time.

At present, data coverage is high for most listed equity and corporate bond portfolios and is available from either investment managers or third party providers such as MSCI or Sustainalytics. Sourcing data for other asset classes is harder and the data is likely to have to come from the investment managers. Coverage is currently patchy, particularly if you want more than greenhouse gas emissions (and at least one additional metric is required under DWP’s proposals). Fortunately, the FCA is looking to introduce TCFD-consistent disclosure requirements for investment managers to help with this.

The last requirement is to set at least one target, in relation to at least one metric. I’m seeing a lot of interest in net-zero targets, although there is no suggestion that this is what DWP expects. Indeed, a shorter-term target is likely to be appropriate. One concern is that meeting the target may be largely outside trustees’ control, particularly if assets are invested in pooled funds. I hope this an area where we’ll see considerable innovation from managers over the next few years, as they start to incorporate climate targets into fund designs. In the meantime, trustees can take comfort that DWP has confirmed that targets will not be legally binding.


The final step of the process is to publish a report setting out how the trustees have fulfilled the various requirements. The timetable for production is the same as for the annual scheme accounts, with a link to the TCFD report to be included within the accounts.

The reports will inevitably be quite long and detailed, yet DWP wants reasonably engaged and informed members to be able to interpret and understand them. Whilst the number of members who read such a report may be quite low, trustees should still take care in its preparation. Public scrutiny of the content is likely, especially for schemes with well-known employers. Climate activists will be ready to hold trustees to account, so you should ensure your climate practices are sound.

Next steps

If you haven’t done so already, check to see if and when your scheme is likely to become subject to the new requirements. If you are in scope, then carry out a gap analysis to see how your current practices stack up against the requirements and work out a plan of action. If you are not in scope, then you don’t need to worry about the details of DWP’s proposals, but you should still ensure that you understand how climate-related risks and opportunities could affect your scheme and that you are managing them appropriately. In either case, we’d be pleased to help; do get in touch.A version of this blog was first published on ESG Clarity.