In a speech at Mansion House on 1 July 2021, the Chancellor outlined his vision for the future of the financial services sector, which included a commitment to "reaffirm the UK's position as the best place in the world for green finance". His announcement that the UK will issue a 'sovereign green bond' in September to help fund green infrastructure projects has attracted widespread publicity, but it is his statement that the Government will launch "new requirements for businesses and financial products to disclose sustainability information" that has the potential to be of most significance to UK pension schemes.
More sustainability disclosure requirements coming to pensions?: Chancellor announces new "integrated" climate change reporting regime
On 18 October 2021, the Government published Greening Finance: A Roadmap to Sustainable Investing, which sets out its plans for aligning the financial system with the UK's commitment to net zero. The paper confirms that the SDR will impose new requirements on occupational pension schemes to assess and disclose their sustainability-related risks, opportunities and impacts.
Businesses and financial institutions will be required to make similar disclosures, and the Government hopes that creating a framework for the disclosure of comparable and "decision-useful" sustainability information across the economy will provide pension scheme trustees with the information they need to effectively integrate ESG considerations into their investment decisions and stewardship activities.
The scope, timing and reporting detail of the SDR for pension schemes will be subject to further Government consultation, but it is proposed that the requirements will be phased in, starting in two to three years' time for schemes with assets of more than £5 billion. We will likely have to wait for the consultation to find out more about the types of disclosure the Government envisages, but it is clear that the SDR is intended to significantly expand upon the TCFD reporting regime which came into force for the largest schemes on 1 October 2021.
For more detail about the Government's proposals, see our legal briefing paper.
But aren't pension schemes already going to be subject to new climate change governance and disclosure requirements from 1 October 2021?
Many pension schemes are, and it is not yet clear from the Chancellor's speech how these fast-approaching TCFD-aligned requirements will interact with the sustainability disclosure requirements he announced at Mansion House.
A press release issued by HM Treasury to accompany the speech provides some, albeit limited, additional detail of the Chancellor's plans. We are told to expect "new integrated Sustainability Disclosure Requirements ("SDR")", which will "streamline existing climate reporting requirements and go further to ensure consumers and investors have the information they need to make informed investment decisions and drive positive environmental impact."
The press release also confirms that businesses, financial services firms and their investment products will be subject to the SDR. No detail has been provided on what type and/ or size of companies will initially be in scope, but the intention appears to be to capture pension schemes as well. The Government intends to set out its approach to green finance regulation ahead of COP26 later this year.
The announcement came as a surprise to many and there has been some speculation that SDR will be a UK equivalent of the EU's Taxonomy Regulation. Although a UK equivalent of this is in the pipeline (the Green Technical Advisory Group has been established to advise the Government on implementing a UK taxonomy regime), our view at this very early stage is that SDR is more likely to be a UK response to the EU's Sustainable Finance Disclosure Regulation and Corporate Sustainability Reporting Directive. Of course, how closely the UK and EU regimes are going to mirror each other remains to be seen.
What does SDR mean for pension schemes?
There is clearly some commonality with the TCFD requirements for pension schemes which come into force from 1 October 2021 – both the press release and accompanying HM Treasury policy paper borrow from the language we have already seen used in the TCFD Regulations to refer to the need for businesses to disclose their impact on the environment and to assess the risks and opportunities climate change poses for their investments – but it seems likely that we will need to wait until full details of the SDR are published the autumn before we know what, if any, additional requirements will be imposed on pension scheme trustees and how these will interact with the existing law.
Although the prospect of additional climate reporting requirements raises the possibility of additional governance burdens for pension scheme trustees, many of whom are currently immersed in the complex world of climate change metrics, it is worth noting that pension schemes are at the vanguard of the UK's approach to tackling climate change, and the prospect of a more fully integrated legal regime covering sustainability across the whole economy may, if it can be delivered successfully, make it easier for trustees to meet their obligations in the long run.
We will continue to monitor any developments and provide further updates in due course.