Climate change is severely impacting on the covenants of a range of employers sponsoring UK defined benefit (DB) schemes, the Employer Covenant Practitioners Association (ECPA) says.

In a paper published today (8 February), the ECPA said climate change is “progressively impacting” the covenant of many sponsors, from impacting upon cashflows to representing a “fundamental risk” to scheme longevity.

It argues that DB schemes should consider the impacts of climate change through sectoral analysis, including regulation and technological evolution, to best consider the impact of climate risks and to identify “red flags for their sponsor”.

ECPA chair Karina Brookes said that stakeholders should “identify specific milestones to monitor against” to evaluate whether specific climate-linked scenarios are likely to emerge.

Given existing climate change reporting requirements – such as the Taskforce on Climate-related Financial Disclosure rules – the paper emphasises that work on climate change evaluation can take place collaboratively with sponsors, building on existing analysis.

Compounding this, Brookes told Professional Pensions that covenant practitioners may be subject to increased scrutiny on the back of a “steep” regulatory trajectory.

She said: “Covenant related regulation will be affected from two directions as it sits in the middle of the impact on the sponsor and the impact on other aspects of the scheme such as funding and investment. Covenant practitioners will need to work with an increasing number of stakeholders.”

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