We understand that trustee boards have an ever-increasing to-do list, but climate change governance shouldn’t be viewed as a tick-box exercise.
Taskforce on Climate-related Financial Disclosures measures are now mandatory in pensions audit reporting for schemes that hold £1bn assets or more, and this may extend to smaller schemes in future.
At RSM UK we have noticed that many trustee boards and their advisers, who draft most reports, focus mainly on satisfying the reporting requirements.
TCFD measures were introduced to track how well financial services providers were meeting environmental impact targets.
But what drove the need for this reporting often gets lost.
To quote Mark Hill in The Pensions Regulator blog: “The goal is not disclosure for disclosure’s sake, but to encourage genuine change in how schemes operate.”
Lack of consistency
Up until now it has been very difficult for trustee boards who want to make a genuine impact to do so.
Some funds claiming to have sustainability credentials were ultimately found wanting, with greenwashing accusations from the regulators levelled at some large investment banks.
A survey by the Financial Conduct Authority as part of its oversight in this area found that 70 per cent of the investors surveyed “tended to agree” that many investments that claim to be sustainable were actually not.
This difficulty is clearly shared by investment advisers too, with a research in finance survey from late 2023 finding that more than half (59 per cent) of the responders felt there were barriers to investing in ESG-labelled funds due to a lack of consistency between labelling and how the funds operated.
The good news for trustees that do want to make a genuine change is that the FCA has risen to this challenge and introduced requirements that aim to provide reporting clarity for trustee boards that put sustainable investing as a priority.
Under these new sustainable development regulations and naming and marketing rules, distributors of such information, such as investment advisers and platform managers, will be expected to communicate a fund's sustainability label and ensure the information being communicated is kept up to date.
These rules, which come into force this December, require fund providers that want to market their funds as having positive sustainability characteristics to apply for a label. The four labels and the criteria are:
- Sustainability Focus – this product’s asset base must be invested in assets that are environmentally or socially sustainable.
- Sustainability Improvers – this is for products investing in assets that may not currently be sustainable, but have a clear aim to improve their sustainability over time.
- Sustainability Impact – this is for products investing in solutions that aim to address problems affecting people or the planet, achieving a “pre-defined positive measurable impact”.
- Sustainability Mixed Goals – this applies to funds that have a mix of the above labels.
A minimum 70 per cent threshold applies to each of the four labels, meaning that not all the investments need to meet the criteria.
However, funds are expected to disclose where the other 30 per cent is invested.
These labels, which are expected to be displayed prominently, are also expected to contain a brief summary of the sustainability goal, investment approach and KPIs, which should be updated annually to demonstrate progress towards the objective.
So, the FCA is breaking down barriers to make sure positive change can be achieved, and I am sure that considering this, TPR will have a keen eye on any future reporting.
