The situation

• Pension Scheme X is sponsored by a global fast moving consumer goods company, which currently provides a Strong covenant given its scale and diversification and the well-funded nature of the Scheme
• The Sponsor’s industry exposes it to a number of climate change related risks, including adverse changes in crop outputs, yields and prices, government regulations and deteriorations in brand reputation

What we did

In supporting the triennial valuation and the Trustees’ TCFD reporting, we helped the Trustees consider a wide range of ESG risks with a particular focus on climate change from both a qualitative and quantitative perspective. The qualitative considerations included:

• The key ESG risks that the Sponsor faces
• The Sponsor’s climate transition action plan, including its path towards net zero emissions and progress to date
• The Sponsor’s ESG ratings by various third party ESG rating agencies and how these compare to those of its peers and how they have developed over time

The quantitative considerations included:

• Analysis of the Sponsor’s disclosure on the potential unmitigated impacts on profit of various climate change related risks and opportunities over different timeframe
• An assessment of how these might impact the Sponsor’s cash flow to support deficit repair contributions (if required) and the Sponsor’s value using a discounted cash flow model
• The preparation of integrated metrics based on the potential climate driven negative impact on the Sponsor as well as the potential downside on the Scheme’s funding

The benefits

• We concluded that the climate change risks faced by the Sponsor would not be a material concern for the Trustees given the headroom in the covenant, the Scheme’s well-funded position, its relatively short journey plan to “self-sufficiency” and the limited near term impact from climate change risks on profits
• In this context, the Trustees were also able to ensure that their current funding target and journey plan were commensurate with the Sponsor’s climate change risks
• Using our analysis as a baseline, we also implemented a monitoring framework which allowed the Trustees to track the Sponsor’s progress in achieving its climate change targets and take action where required

The key takeaways

• In our experience, the quality and detail of public disclosure on climate risks and their potential impact on business operations varies significantly across different sponsors
• A desktop exercise could involve an initial analysis of the potential risks and impacts based on publicly available data
• It is important to differentiate between physical and transitional risks and a starting point for any analysis may be focused on the sponsor’s industry
• More detailed analysis may require a degree of interaction with, and the provision of information from, the sponsor (albeit noting that it is not the trustees’ role to “second guess” or “re-create” climate change analysis on behalf of the sponsor). As such, the information flow between sponsors and trustees is of critical importance
• Considerations should also be given to potential correlation of risks between the covenant and the scheme’s investment portfolio