Consultation outcome

Chapter 4: Disclosing TCFD

Updated 7 July 2021

This was published under the 2019 to 2022 Johnson Conservative government

Background

1. This section introduces our proposals in relation to where trustees should publish their Task Force on Climate-related Financial Disclosures (TCFD) reports, and how they notify both beneficiaries of the scheme and The Pensions Regulator (TPR).

2. The TCFD’s ‘Final TCFD Recommendations Report’^{[footnote 78]} emphasises the importance of including climate-related financial disclosures in an organisation’s annual mainstream financial filings. Significantly, the TCFD concluded that this would “foster shareholder engagement and broader use of climate-related financial disclosures, thus promoting a more informed understanding of climate-related risks and opportunities by investors and others.”

3. The report also argues that this recommendation should help organisations in complying more effectively with existing disclosure obligations by integrating them with climate-related disclosures. This is significant when considering existing statutory requirements on trustees, to publish the scheme’s Statement of Investment Principles (SIP) which sets out trustee’s policies on factors that are likely to have a financially material impact on investment returns, including climate change.

4. As explained in Chapter 2, the very largest schemes have the highest governance and resource capacity. We consider that not only would this enable their trustees to produce TCFD disclosures more quickly, it would also enable them to produce them to a higher standard. The largest schemes possess trustees from whom the regulator expects higher standards.

5. Therefore, the duty to publish facilitates wider industry peer-led learning, with trustees of schemes with £5 billion or more in net assets setting an industry standard to be followed or, at the very least, worked towards.

Publication and explaining the results

6. Our proposed duty to publish recognises the growing government, regulatory, industry and public interest in the sustainability and wider socio-economic value of investment practices.

7. We consider that making this information publicly available would enable members to engage with their scheme’s climate-related performance and its potential impact on their savings for the future.

8. However, we also recognise that there would be challenges in communicating this information to beneficiaries with a wide range of levels of engagement or pensions knowledge. We do not expect engagement from all pension scheme members. Rather, engaged members should be able to interpret and understand trustees’ disclosures, and raise concerns or queries where appropriate. Our proposed statutory guidance would cover this point.

9. Beneficiaries are not the only audience for such disclosures. Trustees and advisers should benefit from sight of one another’s TCFD reports and we believe this would help to improve the quality of reporting. Where disclosures are made fully public rather than only available on request or to a sub-section of the public, this ought to drive up the quality of reporting. Public scrutiny has an important role to play in offering the encouragement to improve. Therefore, we consider that placing a publishing requirement on this information will act as a driver towards trustees producing disclosures of a high standard.

Where schemes would need to publish

10. We propose to require pension scheme trustees to publish their TCFD report, and for this to be available to all, rather than simply making them available to members on request.

11. We propose also that trustees be required to make their TCFD reports accessible for free on a publicly available website and provide a link to them in their Annual Report and Accounts. For occupational pension schemes the Annual Report and Accounts is where annual mainstream financial filings are presented and so, in line with the TCFD’s recommendations, our proposal recognises TCFD reporting as a key financial disclosure which is integral to reporting on the scheme’s overall performance. However, for the avoidance of doubt, trustees are not currently required to publish their scheme’s Annual Report and Accounts, and we are not seeking to change this.

12. In our early engagement with industry stakeholders a significant number raised concerns around including a full TCFD report in their Annual Report. We have taken this concern into account. TCFD reports done well will be quite long and detailed, so requiring their inclusion in full would, we believe, unnecessarily add to the overall length of the Annual Report and Accounts disclosures. It would also result in the TCFD disclosures being subsumed amongst other information.

13. We are also conscious that there has been a significant increase in the number of different disclosure requirements placed on trustees in recent years. Therefore, our proposal to include a link to the TCFD report in the Annual Report provides it with a place in the structure of existing financial disclosures whilst offering flexibility for trustees in the way that they present information. Where trustees publish their scheme’s Annual Report and Accounts, we believe our proposal would provide the added benefit of consistency of access for members looking to easily access the TCFD report. Our proposed approach follows a similar format to the existing requirement to publish parts of the Chair’s Statement, which itself must be included in the Annual Report and Accounts.^{[footnote 79]}

14. Our proposal would mean that trustees could still include a high-level summary of their TCFD report in their ‘main’ Annual Report, alongside the link signposting to where the full report can be found, either on a separate part of their website or another public website. We would deem this as an entirely reasonable approach but to be clear, would not require it in regulations. Our proposals recognise that there could, for example, be significant merit in having a separate location devoted entirely to a scheme’s climate change and broader sustainability considerations. This would allow beneficiaries and other interested stakeholders to view the disclosures in the same place as other topically linked information.

15. Our proposals for the statutory guidance which trustees must have regard to when meeting this requirement are outlined in the box below.

Auditing the Annual Report

16. The reasonable level of assurance provided by the auditors in their audit report relates only to the financial statements included with a company’s Annual report, not to the Annual report as a whole. With limited exception^{[footnote 80]} the auditor does not, in their audit of the financial statements, provide an assurance opinion on the ‘Other Information’^{[footnote 81]} included in the Annual Report. Therefore, trustees would not incur any additional auditing costs as a result of our proposed requirement that the disclosures be included in the Annual Report.

17. However, under ISA (UK) 720 (Revised November 2019)^{[footnote 82]} the auditor’s responsibilities relating to Other Information does require the auditor to consider whether the material contained within any Other Information is consistent with the financial statements and knowledge obtained during the course of the audit^{[footnote 83]}. Where there is inconsistency, the auditor is required to report on this.

18. Where TCFD material is linked to within the Annual Report, it would constitute Other Information and as a result, whilst it would not be audited, it would be subject to consideration by the auditor in line with the requirements of ISA (UK) 720.

19. ISA (UK) 720^{[footnote 84]} is clear that where Other Information is only available via the entity’s website, the version of this information that is considered by the auditor is the one obtained directly from the entity itself rather than from the entity’s website. As such, the auditor would require a copy of the original TCFD material prior to its publication on the entity’s website in order to be able to fulfil their responsibilities in relation to Other Information. Therefore, we propose that statutory guidance should state that the original TCFD report be provided to the auditor at the same time as the Annual Report, thus allowing the auditor to fulfil their responsibilities under ISA (UK) 720 as outlined above.

20. The auditor has no additional responsibility to search for Other Information that may be on the entity’s website, or to perform procedures to confirm that Other Information is appropriately displayed on the entity’s website or otherwise has been appropriately transmitted or displayed electronically.

21. In the future we will continue to consider, in consultation with other relevant bodies, whether to strengthen the auditing requirements that the proposed TCFD reports are subject to, if and when the disclosures become more standardised practice.

Telling members that it has been published

22. Our proposal to place a duty on scheme trustees to notify members of the location of the TCFD report acknowledges that climate risk considerations should be recognised as potentially significant in the investment process. This is not simply an ethical or public relations side project that investors or investment managers can undertake to rebalance other actions. Pension schemes invested in companies and assets where members are not adequately insulated against the significant investment risks that climate change poses risk a potentially significant negative impact on the retirement outcomes for defined contribution (DC) members and significantly increasing the deficits that must be funded by defined benefit (DB) employers through contributions.

23. The Pension Policy Institute’s report in 2018^{[footnote 85]} found that evidence of member engagement in environment, social and governance (ESG) factors is increasing significantly. It is important that this engagement is facilitated further by notifying members about the scheme’s TCFD reports, potentially prompting them to challenge trustees, and where appropriate their employers, to ensure that their pension contributions are being directed into schemes and underlying investments which are properly engaged with this issue.

24. DC scheme members in particular have become more interested in ESG issues amid the coronavirus pandemic, according to the Defined Contribution Investment Forum (DCIF). Their 2020 survey^{[footnote 86]} on responsible investment found that 82% of members surveyed felt society would change forever as a result. Rather than act as a catalyst for increased member engagement DCIF highlight that this has simply accelerated an existing trend. 70% of members have now declared an interest in responsible investment up from 61% just two years earlier, with 73% declaring they feel strongly about environmental issues and 87% feeling businesses have wider societal responsibilities beyond making a profit.

25. We therefore propose that trustees will have a duty to tell members via the annual benefit statement that their TCFD reports have been published, and where they can locate them. Trustees would be required to include a website address link to their latest TCFD report and an explanation of how the recipient may read the information or document on the website. This is in line with the existing notification requirements that fall on trustees about the availability of information on costs and charges, the Statement of Investment Principles and the implementation statement. Similarly, we propose to require that the member be notified of the circumstances when they may request a hard copy of the report. Alignment with current notification requirements would ensure consistency for members and ought not to be burdensome for schemes.

26. We propose that for DC schemes, trustees could choose to provide a single link which points to all the relevant published information required by paragraph 5B of Schedule 6 to the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (“Disclosure Regulations”)^{[footnote 87]}, as long as the link was suitably explained and meets all the requirements specified in regulation 27(2). This would help to alleviate concerns raised during our early stakeholder engagement around the already restricted space in the annual benefit statement for additional text. The website link could direct members to a single holding page where the TCFD report, Chair’s Statement excerpts, Statement of Investment Principles and Implementation Statement have all been published.

27. For DB schemes we propose only to require that a notification be added to the annual benefit statements of the members for whom trustees are already required to produce one. We propose this approach to ensure the disclosure method is consistent between both DB and DC schemes.

28. Similarly, we believe that beneficiaries of Cash Balance schemes – a money purchase benefit with some similarities to DB schemes - because they have some underpinning guarantees – should also be made aware of the website location of the scheme’s TCFD report via their annual benefit statement where one is produced.

29. An alternative for notifying DB scheme members could be the annual funding statement. Regulation 15 of and Schedule 4 to the Disclosure Regulations require a ‘summary funding statement’ to be given to all members and beneficiaries of the scheme, where the trustees or managers of the scheme have obtained an actuarial valuation or report. It is less clear the levels of engagement members have with this document so we would welcome respondents’ views on whether this would be a better notification mechanism for DB members.

30. We are aware that, should our proposals be adopted, some schemes will issue their annual benefit statement months in advance of publishing their TCFD report. In this scenario, we propose that in the first year the requirement to publish a TCFD report applies, schemes should, where possible, state in their annual benefit statement the website location where the TCFD report will eventually be published. They should also state the deadline for publication. We propose that these expectations would be set out in statutory guidance.

31. We propose that in subsequent years, regulations would require trustees to include in the annual benefit statement a link to the most recent TCFD report they have published.

Reporting to The Pensions Regulator

32. Rather than place a requirement on trustees to send a copy of the latest version of their TCFD report to TPR, we propose instead to require them to provide TPR with the full website address where the latest TCFD Report has been published.

33. We propose to achieve this by requiring trustees to include the relevant website address in their annual scheme return by amending regulation 3 (registrable information) of the Register of Occupational and Personal Pension Schemes Regulations 2005^{[footnote 88]}, to include this. Adding the website address of the published TCFD report to the registrable information which trustees must provide would make this a mandatory requirement of the scheme return form.

34. As with our proposals for notifying members, we are similarly aware that, should our proposals be adopted, some trustees will complete their scheme return in advance of publishing their first TCFD Report. In such cases, the requirement to include a link to the published TCFD report would not apply for that scheme return and trustees would be able to leave this field blank in the form.

35. We believe this would avoid an unnecessary duplication of efforts on the scheme’s behalf to inform TPR that a TCFD report has been published. It would also release TPR from the practical supervisory burden of requesting this information separately or actively seeking the disclosure on each scheme’s website separately from the issue and review of the scheme returns.

36. Based on this same rationale we also propose amending regulations to introduce a requirement that the website address or addresses where a scheme’s Statement of Investment Principles (SIP), Implementation Statement and the relevant excerpts of the Chair’s Statement are published, must also be included in the annual scheme return.

Consultation Question

Q10: We propose that, for all schemes in scope:

a) the trustees should be required to publish their TCFD report in full on a publicly available website where the report is accessible free of charge
b) the trustees should be required to include in the Annual Report and Accounts a website link to the location where the most recent TCFD report may be accessed in full
c) the trustees must notify all members to whom they must send the annual benefit statement of the website address where they can locate the full TCFD report – this must be set out in the annual benefit statement
d) the trustees should be required to report the location of their most recent published TCFD report to the Regulator by including the corresponding website address in their scheme return
e) the trustees should also be required to report the location of their published Statement of Investment Principles (“SIP”), Implementation Statement and excerpts of the Chair’s Statement by including the corresponding website address or addresses in their scheme return

Do you agree with these proposals?

Is there a better way to notify members of where to find this information?

For example, for DB schemes, might the summary funding statement required by regulation 15 of the Disclosure Regulations be a more appropriate way to signpost members to this information?

1. Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) – Summary. ↩

2. The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (S.I. 2013/2734) – regulation 12 and Schedule 3, Part 2, paragraph 7 and Part 5, paragraph 34. ↩

3. Certain elements of a quoted companies’ director’s remuneration report are subject to audit. ↩

4. ISA (UK) 720 (Revised November 2019) Paragraph 12(c) ↩

5. ISA (UK) 720 (Revised November 2019) – The Auditor’s responsibilities relating to other information ↩

6. ISA (UK) 720 (Revised November 2019) Paragraph 14. ↩

7. ISA (UK) 720 (Revised November 2019) Paragraph A19. ↩

8. PPI – ‘ESG: past, present and future’. ↩

9. The Key to Unlocking Member Engagement, Defined Contribution Investment Forum. ↩

10. The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013. ↩

11. The Register of Occupational and Personal Pension Schemes Regulations 2005. ↩