Trustees should focus on ‘real-world impact’ to avoid a 'tick-box' TCFD compliance exercise - LCP

The Pensions Regulator (TPR) published its second annual review of climate-related disclosures, revealing that pension trustees are acting to address climate risks and opportunities.

Commenting on the findings, Laasya Shekaran, Senior Investment Consultant at LCP, said: “The goal of climate regulations for investors should focus on real-world impact. It is important for pension scheme trustees to bear this in mind when producing their Taskforce on Climate-related Financial Disclosures (TCFD) reports so that TCFD reporting does not become a ‘tick-box’ compliance exercise. Indeed, effective reporting is best driven by actions.

The feedback provided by TPR is useful to help trustees focus their reports on being more meaningful, thereby driving forward positive real-world change.

TPR notes the importance of using stewardship as a risk management tool by engaging with high-emitting holdings. It also addresses and agrees with some of the commentary from the IFoA and Carbon Tracker that has challenged the scenario analysis undertaken by pension schemes in their TCFD reports.

Usefully, TPR acknowledges that climate scenario analysis has limitations, often not capturing the full extent of physical risks and tipping points. Pension scheme trustees are encouraged to apply qualitative overlays to their scenario analysis to better understand the full potential impact of climate change and, therefore, take action to address climate change risks.

TPR recognises the importance of pension scheme covenant, noting that some of the reports it reviewed had omitted appropriate assessments of the climate risks and opportunities that their sponsors face.

We encourage trustees to use this feedback as an opportunity to help better inform their real-world climate-related actions.”