Climate Risk & Pensions


Implications for investees companies

There is an emerging realisation that risks related to climate change pose a systemic risk to the financial system, and for asset owners, have the potential to lead to portfolio losses.

The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021” expands upon existing obligations under their fiduciary duties, and will undoubtedly ramp up pressure on trustees of asset owners to manage climate risk.

Climate change as part of trustees’ fiduciary duties

Historically, climate change has been considered through an ethical lens, and by and large not considered to pose a risk to portfolio valuation. This is no longer the case, as the world comes to the realisation that a warming world can no longer justify business as usual.

Consideration of climate change is not a new requirement.

Previous regulatory amendments require the inclusion of ESG factors such as climate change within their effective system of governance[1], the Statement of Investment Principles (SIP) when they are financially material[2], and the exercise of rights (proxy voting) and other engagement activities[3].

Strengthening of trustees’ fiduciary duties on climate

Moving forward, trustees will now need to be able to assess, identify, and manage climate-related risks as a prerequisite to making investment decisions. In addition, they have responsibility for establishing and maintaining processes to identify, assess and manage climate-related risks (physical, transition and litigation) which are integrated within their overall risk management, investment, and governance decisions as a source of financial risk.

Who do the new requirements apply to?

From October the 1st 2021, new regulations will apply to pension schemes with assets in excess of £5bn, authorised master trusts and authorised schemes providing collective money purchase benefits. The following year schemes with assets exceeding £1 bn will also be covered. In total, these assets will cover some 70% of assets under management in the UK.

What exposure do funds have to climate risk?

Trustees are now required to identify climate risks and opportunities that affect their investment and funding strategy over the short, medium, and long term. Financed emissions make up the bulk of a fund’s exposure to climate, and as such this exposure will need to be identified and assessed.

This is where scenario analysis is critical, with at least two alternative pathways needing to be considered, alignment to a 1.5°C and 2°C (above industrial levels) pathway. This assessment must take place every three years, with risk management and strategy informed through the results of the scenario analysis.

As a new requirement, funds will need to identify their climate exposure via the calculation of the greenhouse gas emissions (GHG) of financed emissions, which requires the assessment of annual scope 1, 2 and 3 attributable to the scheme’s assets, with the caveat that scope 3 emissions are not expected to be reported against in the first year. This information will be used to calculate the following:

Metric Description
Absolute emissions Total GHG emissions of the scheme’s assets
Emissions intensity Total carbon dioxide emissions per unit of currency invested by the scheme
Fund’s choice For example, portfolio alignment metric or climate value at risk (VaR)


The development of these metrics is still underway and more sophisticated approaches will be generated over time. For instance, the Partnership for Carbon Accounting Financials (PCAF) have developed methodologies to assist with the quantification of exposure for six asset classes (their methodologies are supported by the new TCFD implementation for asset owners):

In relation to targets, at least one of the metrics described above need to have defined a KPI, which is measured against each year. The Government has indicated that the targets should not exceed 10 years.

In the case where a net-zero target of 2050 has been set, this must be accompanied by interim targets aligned with appropriate action to progress against the target. As highlighted in our earlier thought piece ‘Zero Definition’, there are several initiatives underway to ensure robustness in net zero target setting:

When using the SDA or the Temperature Rating Approach, the issue is that methodologies widely available are related to well below 2°C. As we can see they are not net zero aligned. It is key that in the coming months net zero tools become available, especially given the popularity of net zero targets, now taking precedence over previous ‘well below 2°C’ commitments.

Net zero initiatives are in their infancy, and with no guidance provided by the amended regulation. Not only that in the TCFD implementation for asset owners they should disclose their assets, funds and investment strategies aligned with a well below 2°C scenario. Nonetheless, we would think that it is imperative that asset owners consider evolving, emerging leadership practices when thinking through net zero, especially regarding carbon emission reduction and offsetting strategies.

Why investees companies need to address their climate risks

As stated above, trustees’ main exposure to climate is through financed emissions. Where a high level of exposure is identified, trustees will need to set targets to minimize risk, with the required following actions:

In addition to this, investors are increasing their expectations and they are expecting companies to disclose their business model is aligned with the Paris Agreement.

The lack of action in this regard will lead to voting against the directors (See e.g.  Exxon mobile selection of 3 climate activists in the Board) or even divestment as the last resort. Besides, the SBTi allows to set up a target which is the Portfolio Coverage Approach focused on the companies’ commitments to net zero targets. The net zero framework by the IIGCC also contemplates that 90% of financed emissions in material sectors by 2030 and the U.N. Net Zero Protocol includes as a target that the asset owner engages with the 20 companies that are responsible for 65% of emissions in their portfolio, as well as collaborate with other initiatives.

It is worth mentioning that engagement is out of scope of the consultations. However, in order to comply with their duties, it will be a priority as we have seen.

The Sustainable Disclosure Requirements (SDR), which were published in the Greening Finance: A Roadmap to Sustainable Investing, will mandate companies to disclose their transition plan and their capital expenditure which is Taxonomy-aligned. The UK Government is expecting that investors will be using this information in their allocation, engagement and voting decisions.

Under this new landscape, our advice to corporates is that they must engage with their investors and start disclosing their climate risk management and net zero strategy and planning.

Conclusion: what are the next steps?

We encourage trustees as part of their fiduciary duties to engage with these new regulations and continue in their progress to manage their identified climate risks. Investees companies will be subjected to greater scrutiny as their GHG emissions will be accounted for by trustees and will be part of their targets.

Acasta risk can help your company to align your strategy with your investors’ expectations and disclosure requirements.



For more information please contact:

Mohammed Chunara, Director, Climate Risk, Acasta Risk

+44 (0)20 3983 9263 or by email: [email protected]

Alba Fuentes Delpon, Manager, Climate Risk, Acasta Risk

+44 (0)20 3983 9263 or by email: [email protected]

© 2021 Acasta Risk



[1] The Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 (UK), regulations 2 (3) (1), 3 (2) (h).

[2] The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018 (UK), regulations 4(2)(a)(ii), 4 (b) (4).

[3] The Pension Protection Fund (UK), regulation 4(2)(a)(iv).

[4] See e.g., ShareAction, ‘Voting Matters: Are asset managers using their proxy votes for climate action?’ (2019).

[5] See e.g., Climate Action 100+, ‘Shareholders approve a climate lobbying proposal at Delta’ (2021).

[6] See e.g., Blackrock ‘Pursuing long-term value for our clients. BlackRock Investment Stewardship. A look into the 2020-2021 proxy voting year’ (2021).

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