The Pensions Regulator's Pathway to Net Zero: a comprehensive approach for climate action

April 15, 2024

2023 was the hottest year on record, with natural disasters being reported from all around the world. The race to respond to the climate challenge is imperative for all, and the pensions industry is no exception. In light of this, The Pensions Regulator (TPR) has recently published its "Pathway to Net Zero report," which focuses on the third aim of TPR's Climate Change Strategy.

Published in April 2021, TPR's Climate Change Strategy sets out three aims. Two are regulatory, relating to how TPR can influence the industry approach to climate change, whilst the third aim concerns TPR's own operations. The Pathway to Net Zero report explains how TPR intends to achieve this operational aim and specifically, what TPR will do to achieve its net zero goals.

The report is ambitious and emphasizes the urgency of addressing climate change, acknowledging the role of pension schemes in managing climate-related risks, but also recognizing the need for TPR to lead from the front in cutting carbon emissions.

The net zero goals

• A 2030 operational net zero goal delivering a minimum 90% reduction against Scope 1 and 2 emissions and some elements of Scope 3.
• A 2050 science-based net zero goal delivering a minimum 90% reduction against all emissions.

Given the difficulties in identifying and measuring Scope 3 emissions, the 2030 target focuses on the operational emissions over which TPR has greatest control - namely in relation to gas, electricity, business travel, water and waste, which are mostly Scope 1 and 2 emissions. The 2050 target extends to Scope 3 emissions.

By way of reminder, the different emissions categories are:

• Scope 1 emissions (direct emissions from owned or controlled sources, such as gas combustion in boilers).
• Scope 2 emissions (indirect emissions from the generation of purchased energy).
• Scope 3 emissions (indirect emissions, not included in Scope 2, that occur in the value chain).

2030 target: identifying and measuring emissions and modelling interventions

The report identifies the specific emissions that TPR will measure under Scope 1 and Scope 2 and assesses fifteen categories of Scope 3 emissions for materiality and relevance to TPR, which shows that eight categories are most material to TPR.

The report goes on to explain the approach that TPR takes to gathering and auditing sustainability data, whilst acknowledging the practical difficulties in doing this. In addition, the report sets out a year-by-year programme of the interventions that TPR intends to implement in order to support achievement of its 2030 target. These interventions include measures such as improving building energy efficiency in various different ways, reducing business travel and introducing carbon literacy training for staff.

The report recognises that TPR may need to purchase carbon credits but stresses the importance of buying only reputable carbon credits, to ensure genuine reductions in greenhouse gas emissions.

2050 target: additional interventions

In addition to the interventions mentioned above, achieving the 2050 target will require TPR to focus on decarbonising its supply chain which will require extensive engagement with its suppliers. The report states that TPR will develop interim targets around this in due course.

Reporting and transition

TPR aims to align with the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations and to include TCFD-aligned disclosures in its annual report and accounts, phased in over three years, starting with the 2023/24 accounts. Importantly, TPR has also outlined its intention to publish a Transition Plan in 2025 to 2026 aligned with the 1.5°C ambition of the Paris Agreement.

The wider context

This report comes at a time when TPR has published its latest analysis of pension scheme TCFD reports based on its review of a sample of 30 reports for scheme year-end dates between 1 October 2022 and 30 September 2023. The analysis found many examples of good strategic decision-making, with the majority of schemes sampled having some sort of net zero goal with a target date of 2050 or before. As expected, the analysis also identifies areas for improvement and includes observations on good practice to help schemes.

Also, the Transition Plan Taskforce has recently shared its final set of resources intended to support the transition to net zero. Although pension schemes are not currently required to have transition plans, in practice a transition plan is key to the effective management of climate-related risks and opportunities.

Conclusion

Climate change is a challenge to be addressed by everyone. Regulation has placed pension schemes at the forefront of the efforts to manage climate risks and opportunities and so it is both appropriate and helpful that TPR should be subject to similar requirements and has hands-on experience of the many data and methodology issues that trustees are confronted with.

In commenting on this latest report, TPR has stated that "Our aim is to help the pensions market manage the transition to a net-zero economy". With the climate crisis being imperative, and with the increasing importance of Environmental, Social and Governance (ESG) considerations for schemes, trustees, scheme providers, and employers must continue to prioritize the management of these issues.