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Climate risk governance reporting and penalties

Climate risk governance reporting and penalties

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Volume 2021 | Issue 30

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The largest pension schemes (those with assets of at least £5bn and authorised master trusts) will be required to monitor and report on how they are complying with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) from 1 October 2021.

Pension schemes with at least £1bn in assets become subject to these requirements next year, and the expectation is that smaller pension schemes will have to comply in due course.

The Pensions Regulator has consulted on its proposals for checking that trustees are meeting their obligations in this area, and the penalties to apply where they don’t.


From 1 October 2021, trustees will be required to identify, assess and manage climate-related risks and opportunities, and produce a report describing the steps they have taken. These requirements are set out in the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (the regulations). When the DWP was consulting on the regulations, respondents expressed an interest in hearing directly from the Regulator about its approach and expectations.

The Regulator has consulted on draft guidance on what trustees have to do to confirm they are complying with the legislative requirements and also a draft appendix to its monetary penalties policy that sets out how the Regulator will approach breaches of the law.

The consultation ran until 31 August 2021.

What is the Regulator seeking from trustees?

To help the Regulator decide whether trustees have complied with the legal requirements from this October, and followed the DWP’s statutory guidance, it will be looking for clear evidence that trustees:

  • are taking proper account of climate change when making decisions about their scheme, and that they are receiving help from their advisers;
  • have carried out their analysis in a consistent way with the TCFD recommendations;
  • have seriously considered the risks and opportunities that climate change will bring to their scheme, in its particular circumstances; and
  • have decided what to do as a result of this analysis and have set a target to help to achieve that goal.

This list is not exhaustive but indicates how the Regulator expects trustees to demonstrate good governance of climate-related risks and opportunities.

The Regulator does state that while the guidance is focused on trustees with a legal responsibility for meeting the new reporting requirements, other trustees may wish to follow the guidance to improve the climate change governance and resilience of their schemes.

Trustee knowledge and understanding

The draft guidance notes how quickly information on climate-related risks and opportunities is evolving. Trustees must ensure their knowledge and understanding relating to the identification, assessment and management of risks and opportunities relating to climate change is up to date.

The Regulator expects the actions trustees take should comply with the legislation, and the information that trustees report should demonstrate that they know and understand the risks and opportunities that climate change presents to their pension scheme.

Penalties for breaches of the law

The draft appendix to the monetary penalties policy details mandatory and discretionary penalties for non-compliance with the legislation.

Mandatory penalties

The Regulator must issue a penalty of at least £2,500 where trustees fail to publish their climate change report on a publicly available website, accessible free of charge, within the required timeframe. This penalty will normally double in the case of repeated breaches and where a scheme has appointed a professional trustee (in recognition of the higher standards of governance expected in such cases).

Discretionary penalties

In considering whether to impose a discretionary penalty under the regulations, the Regulator will take the same approach as set out in its monetary penalties policy for other discretionary penalties.

The amount of the monetary penalty will generally depend on the persons concerned, band level and any aggravating or mitigating factors. The draft appendix to the monetary penalties policy sets out examples of the penalties. Multiple breaches are likely to be treated more seriously.

‘As far as they are able’

A number of the provisions in the regulations require trustees to take certain steps ‘as far as they are able’, such as when undertaking scenario analysis. This means that trustees must take reasonable and proportionate steps, considering costs and time commitments.

As trustees only have to carry out these tasks ‘as far as they are able’, the legislation recognises that there may be limitations on what they can reasonably do. Trustees should refer to the DWP’s statutory guidance, which provides further information on how there may be gaps in the data relating to climate change risks that trustees are able to obtain, or limitations on trustees’ ability to quantify certain risks, or carry out scenario analysis.

Where such problems are encountered, trustees are expected to be able to describe and explain the steps they have taken to ensure compliance with their legal obligations, the obstacles they have encountered, and the impact those obstacles have had. Trustees should have documented the position in order to demonstrate and explain their actions.

An interpretation of ‘as far as they are able’ will be scheme specific and so the Regulator will consider whether the legislative conditions have been met on a case by case basis.


Trustees should be reassured by the Regulator’s proposals. The draft guidance is not overly prescriptive, and it would appear that as long as the DWP’s statutory guidance has been followed, trustees should be able to demonstrate their compliance with the regulations. Further guidance is to be provided to trustees in the new single code of practice that the Regulator is currently preparing.

The proposed updates to the monetary penalties policy look to ensure consistency with existing practice. The mandatory penalties that apply for a failure to publish a climate change report on a public website may not be welcomed, but are indicative of the way the DWP is seeking to penalise governance failures, such as with the automatic penalties that already apply for failing to prepare a DC chair’s statement.