Rethinking climate risk governance

As the importance of addressing climate change becomes increasingly evident, regulators are placing greater emphasis on climate risk governance within the financial sector.

The Task Force on Climate-related Financial Disclosures (TCFD) has been at the forefront of this movement, urging organisations to assess and disclose their climate-related risks. The Pensions Regulator (TPR) has made it clear that even schemes not caught by the full TCFD reporting requirements should consider their approach to addressing climate risk. So what should trustees be thinking about?

Solid foundations

The foundation of climate risk management is good governance. It is the first element of the TCFD framework and forms a basis for all subsequent actions and decision-making. It is crucial to address governance as a primary step to:

• help establish clearly defined objectives;
• ensure that all relevant stakeholders are involved and engaged from the outset;
• avoid unnecessary work and ensure tasks and responsibilities are allocated to the appropriate people; and
• establish appropriate processes and resources to meet the objectives.

In short, establishing a clear governance framework sets any project up for success. It ensures that all the detail is being attended to while allowing trustees and sponsors to keep focussed on the big picture.

Ahead of TPR’s General Code - which once released will support trustees to establish an Effective System of Governance (ESoG) – you may already be reviewing your governance policies and processes. While the General Code may not have a huge focus on climate risk, it presents an ideal opportunity to embed climate risk governance within the ESoG framework, ensuring that it becomes an integral part of the overall governance structure, enhancing its effectiveness and long-term sustainability.

Scenario planning

Scenario planning could be another option for identifying, measuring and responding to your organisation's climate-related risks - this is an innovative technique which involves forward thinking and comfronting assumptions about the future, and has often proved effective for developing insight and managing uncertainty.

Scenario planning was something that originated as a military technique in the 1970's to analyse and generate responses to complex situations. However, since the Covid-19 pandemic more and more organisations have been turning to scenario planning to help protect and develop their organisations. 

If you would like to learn more on scenario planning, our Risk Portal contains a practical guide which we created in collaboration with Aimic and ORIC International, as well as a guide to help you design your excercise.

Looking back

Even for schemes that have already made progress in addressing climate risk, taking a step back and assessing the governance in place is advised. Climate risk governance should periodically be reviewed to keep pace with emerging challenges and regulatory expectations. 

While some trustee boards might take the view to wait for the final General Code publication before developing and implementing new policies, it's important not to delay another critical aspect of governance - Trustee Knowledge and Understanding (TKU). 

Trustees are not expected to become climate science experts, but they should strive to acquire a certain level of knowledge on general climate science concepts and terminology. This knowledge will equip trustees to understand the advice they receive, actively participate in discussions, and make informed decisions.

That training should ultimately carry across and support trustees in a pension scheme context. This is where we can support. Discussions on climate risk can become dominated by capital allocation considerations (i.e. investments). This is no doubt important, but it is vital to acknowledge its impact on all aspects of Integrated Risk Management (IRM). Trustees should seek pensions-focused training that explores the broader implications of climate risk on a DB pension scheme, say, including potential impact on sponsor covenant and future funding strategies. 

If you would like to hear more about the training that Barnett Waddingham can provide or would like assistance with a review of your ESoG, please speak to your usual BW contact.