Climate disclosures

What’s the context?

The Task Force on Climate-related Financial Disclosures (TCFD) was published in 2017. Its recommendations established a set of 11 clear, comparable and consistent disclosures through which exposure to climate-related financial risks and opportunities can be identified, assessed, managed and disclosed.

The TCFD recommendations can be considered in four areas, as applicable, to pension trustees as follows:

Although the TCFD recommendations focus on “disclosures” by organisations, the framework is fundamentally a useful tool for pension trustees in assessing the relevance of climate change and managing any consequences. The TCFD recommendations form the basis of the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (the Climate Change Governance Regulations) and accompanying statutory guidance.

What are my compliance obligations?

The Climate Change Governance Regulations took effect from 2021 under the Pension Schemes Act 2021. They focus on improving climate change risk, governance and reporting by pension trustees.

The requirements were phased in:

• master trusts and larger schemes with net assets of £5bn or more were required to comply from 1 October 2021, and
• schemes with £1bn or more of assets had to comply from 1 October 2022.

Trustees of schemes in scope are required to put in place appropriate governance arrangements to manage climate-related risks during the first scheme year in which the Climate Change Governance Regulations apply to them. They must then produce and publish an annual report on how they have done so within seven months of their scheme year end date.

Amendments to the Climate Change Governance Regulations require trustees, since 1 October 2022, to calculate a “portfolio alignment” metric setting out the extent to which the scheme’s investments are aligned with the Paris Agreement goal of limiting global warming to well below 2˚C and pursuing efforts to limit it to 1.5˚C above pre-industrial levels. This must be calculated and reported on in addition to the three original metrics.

The amended Climate Change Governance Regulations provide trustees with flexibility to select the type of portfolio alignment metric that best reflects their circumstances.

Governance

Trustees of schemes in scope must establish and maintain oversight of the climate-related risks and opportunities that are relevant to their scheme. They must also establish and maintain processes to check:

• that people carrying out governance activities on their behalf are taking proper steps to identify, assess and manage relevant climate-related risks and opportunities, and
• that people who advise or help the trustees with governance activities are taking proper steps to identify and assess climate-related risks and opportunities.

Trustee knowledge and understanding

Trustees must also maintain their knowledge and understanding of the identification, assessment and management of the risks and opportunities relating to climate change.

• For more on this see Climate – financial risks and opportunities

  

Strategy

Trustees of schemes in scope must identify the climate-related risks and opportunities that they consider will have an effect on the scheme’s investment strategy (and funding strategy where applicable) and assess their impact.

Trustees are required to identify these risks and opportunities and their impact over the short, medium and long term.

Considering climate change as part of a scheme strategy will involve looking at how climate related issues might impact the scheme’s investment portfolios (including the default fund(s) in a DC scheme) and, in a DB scheme, its funding strategy and employer covenant.

When thinking about their investments, trustees should consider how they intend to factor climate-related risks and opportunities into the scheme’s investment strategies – both at total fund/strategy level, and individual asset class level.

Of course, pension fund investment allocations are unlikely to stand still.

In a DB scheme: they may be expected to change over time with a derisking flight plan.

In a DC scheme: they may be expected to change as part of a life styling plan.

Trustees will need to take care to identify and consider within their strategy any areas where asset allocation ranges and portfolio structure are expected to evolve in the future.

Scenario analysis

Trustees of schemes in scope must, as far as they are able, undertake scenario analysis. This is a well-established tool for understanding possible alternative futures and developing strategic plans that are more flexible or robust to a range of plausible future states.

Carrying out climate scenario analysis is a key part of the regulations and a required element of reporting for schemes in scope.

Scenario analysis must assess:

• the impact on the scheme’s assets and liabilities
• the resilience of the scheme’s investment strategy, and
• (where it has one) the scheme’s funding strategy for at least two scenarios – one of which corresponds to a global average temperature rise of between 1.5°C and 2°C inclusive on pre-industrial levels.

Scenario analysis must be carried out in the first year in which the requirements apply to the scheme, and at least every three years thereafter.

Whenever trustees carry out fresh scenario analysis, the three-yearly cycle is automatically reset. Where a scheme has both DB and DC sections, separate scenario analysis is required for both the DB section(s) and the DC default fund(s).

Pension schemes can use scenario analysis to assess their scheme’s resilience to climate-related risks and opportunities, including:

• asset-side changes such as potential earnings impairment or enhancement of companies they invest in and lend to – for example, as a result of transition policies, demand changes, physical impacts, and other factors such as litigation risks, and
• in the case of DB schemes, liability-side changes such as inflation, interest rates, longevity and the strength of the sponsoring employer covenant.

Risk management

Trustees of schemes in scope must:

• establish and maintain, on an ongoing basis, processes for identifying, assessing and effectively managing climate-related risks that are relevant to the scheme, and
• integrate them into the trustees’ overall risk management of the scheme.

In their TCFD report trustees should then describe the processes they have established and how these are integrated within the overall risk management of the scheme.

Trustees should always take into account any relevant matters that are financially material to their investment decision-making. This may be about whether a particular factor is likely to contribute positively or negatively to anticipated returns. But it may equally be about whether a factor will increase or reduce risk.

That climate change might pose a significant financial risk to pension schemes is becoming increasingly apparent. Where financially material to a scheme, it should be taken into account by trustees in their investment decision-making.

There is a distinction between transition risks and physical risks.

Transition risks relate to the risks (and opportunities) from the realignment of the economic system towards low-carbon, climate-resilient or carbon-positive solutions – such as via regulations or market forces.

Physical risks relate to the physical impacts of climate change – such as rising temperatures, rising sea levels, and increased frequency and severity of extreme weather events.

What to measure and how – metrics

Trustees of schemes in scope must select and report on at least four climate-related metrics for each of a scheme’s DB sections and popular DC arrangements as follows:

• one “absolute emissions” metric – the statutory guidance recommends total greenhouse gas (GHG) emissions of the portfolio
• one “emissions intensity” metric – the statutory guidance recommends tonnes of GHG emissions for each million (£m) of the scheme’s assets
• one “additional” climate change metric – the statutory guidance provides a range of options, and
• one “portfolio alignment” metric setting out the extent to which the scheme’s investments are aligned with the Paris Agreement goal of limiting global warming to well below 2°C, and pursuing efforts to limit it to 1.5°C above pre-industrial levels.

Trustees will be required, as far as they are able, to use total emissions and carbon footprint metrics – calculating Scope 1 and 2 GHG emissions in the first scheme year the requirements apply to their scheme, and then Scope 1, 2 and 3 in all subsequent years.

If trustees use a different absolute emissions or emissions metric from those in the statutory guidance, they should explain why.

Trustees must set a non-binding target for the scheme in relation to at least one of their chosen metrics and, as far as they are able, measure performance against it on an annual basis.

Disclosing emissions and other climate-related metrics is a key element of the regulations and trustees should not be surprised if members and civil society groups use a scheme’s disclosures as a yardstick to judge their climate performance.

For their emissions metrics trustees will need to understand the distinction between an issuer’s direct GHG emissions (Scope 1 and 2) and indirect GHG emissions (Scope 3):

• Scope 1 – all direct emissions from the activities of an organisation or under their control, including fuel combustion
• Scope 2 – indirect emissions from electricity purchased and used by the organisation. Emissions are created during the production of the energy which is eventually used by the organisation
• Scope 3 – all other indirect emissions from activities of the organisation, occurring from sources that they do not directly control, including supply-chain operations and end-product usage by customers. For some companies and industries, Scope 3 emissions dominate the overall carbon footprint.

For their “additional” climate change metric, the statutory guidance provides examples of non-emissions metrics that trustees might use.

What are the latest developments?

Schemes in scope of the requirements are now well accustomed to reporting. In June 2025, the Department for Work & Pensions announced in its Transition plan requirements consultation that it plans to undertake a review of the Climate Change Governance Regulations “this year”, reviewing the impact of the current disclosure regime and considering potential next steps.

The Task Force on Nature-related Financial Disclosures (TNFD) has developed a voluntary framework for nature-related disclosures that mirrors the TCFD structure.

For details on how TNFD may affect pension schemes in the future, see TNFD