Our 5 Tips for getting through your first Taskforce for Climate-Related Financial Disclosures (TCFD) report for UK Pension Funds
New UK legislation based on recommendations from the Taskforce for Climate Related Financial Disclosures (TCFD) requires that some companies, including certain pension schemes, report on the extent to which adequate governance, strategy, climate risk management, and metrics and targets are in place to address climate-related issues.
This may feel like a daunting task, however, it does not need to be the case. Our partner Dean Watton Advisory (DWA) has a strong sustainability and TCFD consulting team who are experienced in developing TCFD reports and have completed a number of TCFD reports on behalf of clients in recent months. DWA understand how tricky developing a robust TCFD report can become, considering there is no significant mode of measurement, nor is there a silver bullet to the climate change issue. As such, we have developed a process that ensures the alignment of members’ pension schemes with TCFD regulations, as much as possible.
This report is more than a box-ticking exercise. If done properly, it provides a rigorous basis for influencing the investment strategy over time. What we have seen is that when trustees, members and risk assessment managers actively monitor and strategies their investments, it can greatly relieve pressure on future, avoidable risks. Additionally, the more that trustees work towards achieving net zero carbon emissions, the greater they benefit from their investments.
DWA, our training partners, know that writing TCFD reports can be complex, but it doesn’t need to be. Here are the five things to know before embarking on your first TCFD report:
1. Writing a Taskforce for Climate Related Financial Disclosures (TCFD) report is a big task.
The earlier you start on it, the easier it will be. Some people tend to treat reports with a
‘file-at-the-end’ approach, however, it pays to start early. We started by drafting a ’mock’ TCFD report with our client. This initial report covers a pre-regulatory period of the company’s progress. In doing so, we are then able to refine and perfect the second and final report, which is delivered after year-end.
2. Expect to compromise within this process; this needs to be a collaborative effort.
You may not receive all the metrics you want, but as long as you can demonstrate reasonable efforts being made to meet the disclosure requirements and explain what is missing, the regulator is unlikely to punish trustees for not having all the answers now. We have already had a few meetings with the Pension Regulator, and provided our feedback on what we have learnt.
In our experience we have had to compromise on metrics, choosing between those which provide more useful information against those that provide better coverage of the data. Because we started writing the reports early on we were able to work with managers so they better understood what we needed and could improve the quality of data as a result.
3. Understanding that no one knows exactly what’s going to happen, the best approach shows steps towards change.
The report should revolve around your best understanding towards different sets of scenarios. For example, in our approach we draft two key scenarios; one considers the circumstances and effects that follow current policies which risk a temperature rise of 3°C, and the second which looks at a successful transition to a below 2°C rise in temperature. We then assess how these two scenarios will affect investments across asset classes, and how we can relieve the pressure of unforeseen risks and pursue climate-related opportunities. It is important to note that the report isn’t written to scaremonger, but its purpose is to rather keep everyone informed, up-to-date and able to make efficient decisions around the potential circumstances.
4. The report must be digestible and translatable.
Your members may not know, nor even care about the report and the data; however it must highlight why pension savers should care, and how these situations could affect them. It is important the report helps organizations clearly understand the risks of climate change and its potential impact on investment strategies.
5. TCFD reporting is progressive.
No one has all the answers yet, but we have to start somewhere. This is not just an exercise to tick off the list, it is designed to mobilize the power that pension Trustees and other stakeholders have to enact change. TCFD reports are becoming mandatory for many organisations, the sooner you start, the easier it will become.
Our partner Dean Wotton Advisory UK Limited is authorized and regulated by the Financial Conduct Authority and believes that the TCFD recommendations are an important step on the journey to carbon net zero.
If you are interested in our training specific to UK regulatory requirements please view our training courses here. We have online courses or live training tailored to your organization.
