UK Regulator Sets Out Climate Change Investment Guidance For DC Schemes

The UK’s Pensions Regulator (TPR) has issued updated guidance for defined contribution (DC) investments that includes an obligation on trustees to consider climate change when producing their investment strategy.

The new DC investment guidance incorporates regulations that are due to come into effect in October 2019 and October 2020, and has been published in response to industry requests for further guidance in certain areas.

According to David Fairs, executive director of regulatory policy, analysis and advice at TPR, climate change is a “core financial risk which trustees will need to consider when setting out their investment strategy”.

“They will be obliged to show how they are taking this and other financially material considerations into account over the lifespan of investments,” he added.

TPR’s guidance stated: “Consideration of ESG factors allows you to evaluate the short and long-term financial risks and opportunities of your investments by looking at the current practices of the firms in which you invest.”

It added that it was important for trustees to understand “the implications of the systemic risk of climate change on investment decisions in the context of your scheme when developing your SIP [statement of investment principles]”.

Guy Opperman, minister for pensions and financial inclusion, said pension schemes had a significant part to play in tackling the climate emergency.

Vassos Vassou, a professional trustee at Dalriada Trustees, added: “With climate issues becoming front of mind, we need to be conscious of what our members want from their investments and act responsibly on their behalf.”

From October this year, trustees must make their SIP available free of charge on a website.

Then from October 2020, trustees will have to produce an implementation report that explains how they have followed and acted on the investment policies outlined in the SIP, such as environmental, social and governance factors, and stewardship of investments.

Daily dealing and liquidity

TPR’s new guidance also addressed asset liquidity and dealing frequency, stating that it “may not be beneficial for dealing to be carried out daily”.

In the updated guidance, TPR said trustees should think about the level of liquidity that members need, and take into consideration “the liquidity constraints on certain fund structures”.

Earlier this month, financial services regulator the Financial Conduct Authority revealed it was reviewing its rules about open-ended funds holding illiquid assets after Woodford Investment Management had to halt redemptions from its LF Woodford Equity Income fund, which had a significant allocation to illiquid companies.