Understanding TCFD from a pension plan perspective
Background context: What is TCFD?
On December 4, 2015, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was asked to develop recommendations for voluntary, consistent climate-related financial disclosures for use by companies in providing information to stakeholders, including lenders, insurers and investors (the Recommendations). The recommendations were published in the TCFD Recommendations Report on June 29, 2017.
While the Recommendations do not have the force of law in Canada, support for the TCFD has increased rapidly, with more than 3,400 supporting organizations, spanning both public and private sectors, and representing more than 70 industries in 95 countries and jurisdictions.
The Recommendations are structured around four pillars that represent core elements of how organizations operate – governance, strategy, risk management, and metrics and targets. The Recommendations can be considered to apply to pension trustees, as asset owners, as follows:
Governance refers to the way a plan operates, including the role of the trustees in overseeing climate-related issues, as well as assessing and managing those issues. Trustees should consider the processes and cadence by which climate-related issues are discussed and how progress and specific targets for addressing climate-related issues are monitored.
Strategy refers to how trustees consider climate-related issues and their effect on the plan’s funding and investment strategies over the short, medium, and long term. Trustees should disclose the actual and potential impacts of climate-related risks and opportunities on the pension scheme where such information is material. This includes considering different climate-related scenarios and disclosing the resilience of the plan’s investment and funding strategies in such scenarios.
- Risk Management
Risk management refers to the way in which trustees identify, assess and manage climate-related risks. This includes disclosing the processes used for assessing the size and scope of climate-related risks, as well as the risk terminology which is used or referenced. Trustees should also consider how these processes are integrated into the plan’s overall risk management framework.
- Metrics and Targets
Metrics and targets refers to the metrics used by the trustees to assess and manage climate-related risks and opportunities, as well as the targets against which performance is evaluated. In particular, the recommendations propose specific disclosure requirements pertaining to various levels of greenhouse gas (GHG) emissions.
Fiduciary duty of plan administrators
In addition to its statutory obligations, a pension plan administrator is a fiduciary at common law in relation to the beneficiaries of the pension fund. As fiduciaries, pension plan administrators owe plan beneficiaries a duty of loyalty and a duty of prudence. The duty of loyalty demands that plan administrators act in the best financial interest of plan members. The duty of prudence demands that plan administrators be informed about risks facing the pension fund and to appropriately safeguard the fund against undue risk. Taken together, these fiduciary responsibilities should incentivize plan administrators to consider climate-related issues as part of their investment and funding strategies.
The climate crisis, and climate-related issues more generally, pose a financial risk to plan assets, and trustees should consider how, and to what extent, this could impact their investments and the necessary actions that arise from that assessment.
Regardless of whether a pension plan is required to make TCFD disclosures or chooses to do so voluntarily, the Recommendations are intended to help trustees lay the groundwork and develop good practice. By applying the Recommendations, pension trustees will be better able to assess and understand what climate change actually means for their particular plan and will be better equipped to make decisions that ensure the best outcome for its members.
TCFD in Practice: The United Kingdom’s Pension Schemes Act 2021: Climate Change Governance and Disclosure Requirements
The United Kingdom’s recent initiatives provide a workable example of climate change risk management in the context of pensions and is likely to pave the way for Canadian regulators.
The Pension Schemes Act 2021 (the PSA 2021) provides wide ranging obligations on trustees in relation to climate change governance and reporting, as well as the requirement to produce a publicly available TCFD report. Starting October 1, 2021, trustees of larger occupational pension schemes, namely those with assets under management of £5 billion or more, are required to assess, manage, and monitor the impact of climate-related risks on their scheme on an ongoing basis, while schemes with assets under management of £1 billion or more will have to comply with the new regulations by October 1, 2022. The pension regulator is also given the power to issue compliance notices, as well as penalty notices in the event of continued non-compliance.
While Canadian regulators have yet to adopt a similar TCFD framework as an attempt to evaluate and integrate climate change risk management practices into the investment and management strategies of pension plans, it is likely a question of when, and not if. The Office of the Superintendent of Financial Institutions (OSFI) recently released a draft guideline, proposing a framework that is more climate sensitive and one that recognizes the impact of climate change on managing risk. OSFI is also planning to introduce mandatory climate-related financial disclosures which align with the TCFD framework. While this guideline does not apply to federally regulated pension plans, it does shed light on how financial regulators are viewing and considering the risks associated with climate change.
 The FSB is an international body that monitors and makes recommendations about the global financial system.
 See Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures.