Managing sponsor climate risk and TCFD

The background

We advise the trustee of a scheme sponsored by a financial services business. We have been appointed for a number of years and have provided valuation, monitoring and transactional services, but have seen our clients’ needs change over time as regulation has developed.

Our solution

As the scheme had more than £1bn of assets, it needs to report on its approach to managing climate related risks under Task Force for Climate-related Financial Disclosures (TCFD) requirements.

However, although this was a catalyst for the trustee to commission us to undertake some covenant analysis in this area, we structured our advice so that it would allow the trustee to make more informed judgements about covenant risk in general when making strategic journey planning decisions.

We engaged with the sponsor’s management team to understand their governance structures and processes for managing climate risks as well as the opportunities that the climate change provided to the business. We also undertook benchmarking exercises versus peers and considered reports from external agencies.

The results

We provided a report to the trustee which provided an integrated assessment of how climate risks could impact on both the scheme and the sponsor. We did this by considering the different short-, medium- and long-term time horizons of the scheme’s journey plan and considered how the sponsor covenant was exposed to different forms of climate risk under each pathway (considering both transition and physical risks).

This allowed us to pinpoint the scenarios where climate risk would be most likely to adversely impact the sponsor. Armed with this information, and comparing to scenarios where the schemes assets may be most impacted, we could then reassess the existing strategy and contingency plans to conclude whether they remained fit for purpose.