ESG on the trustee meeting agenda

15th April, 2021

  • “The UK is set to become the first major economy to require climate risks to be specifically considered and then reported on by pension schemes …. Together, we can build a better, safer and greener pensions system” – Guy Opperman, the Minister for Pensions.

    There is a sustained push by legislators for trustees to bring Environment, Social and Governance (ESG) initiatives far up their agenda.

    2020 saw a number of schemes publish their first round of implementation statements which outline trustees’ policies on exercising voting rights and how engagement with their investments have been undertaken.

    At the beginning of 2021, the DWP published a guide on aligning pension schemes with the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations. The DWP also consulted on proposals requiring schemes to address climate change risks.

    In February 2021, the Pension Schemes Act 2021 received Royal Assent. The Act includes regulations on climate change risk. These are still subject to consultation but should be finalised sometime this summer and will require TCFD disclosures to be published in scheme annual reports:

    • From October 2021, schemes with £5bn or more assets, authorised master trusts and collective money purchase schemes
    • From October 2022, schemes with £1bn or more assets.

    The Pensions Regulator has also published its Climate Change Strategy. David Fairs, TPR’s Executive Director of Regulatory Policy, Analysis and Advice has said “Our strategy outlines how we will help trustees comply with the new rules for larger schemes, but it signals work on climate change needs to happen right across the pensions landscape – climate change is a risk for schemes whatever the size or investment strategy. It is clear that all schemes need to build their capacity in this area if they haven’t already.”

    More than just the ‘E’

    While recognising the increased focus on environmental issues and, notably, climate change risk, trustees must also pay attention to other areas of ESG. The DWP has launched a call for evidence on the ‘S’ of ESG  – the Social element of investing and “seeks views on the effectiveness of occupational pension scheme trustees’ current policies and practices in relation to social factors”.

    Minister for Pensions Guy Opperman, launching the Call for Evidence, said “I’m proud of the progress we have made in bringing environmental and climate issues up the pensions agenda .… but climate change should not be trustees’ sole consideration. Financially material social factors also pose risks to schemes’ investments”.

    What this means for trustees

    Going forward, trustees will need to check whether or not their scheme is in scope of the requirements of the Pension Schemes Act 2021. If their scheme is in scope then ‘G’ for governance will most certainly come into play, as trustees will need to consider:

    • when action will be required
    • what data will be needed
    • what trustee training will be necessary
    • how the scheme’s investment strategy, processes, monitoring and reporting will be affected
    • what steps might be needed to align with the TCFD recommendations

    Links

    Aligning your pension scheme with the Taskforce on Climate-Related Financial Disclosures recommendations – GOV.UK (www.gov.uk)

    Taking action on climate risk: improving governance and reporting by occupational pension schemes – response and consultation on regulations – GOV.UK (www.gov.uk)

    Climate change strategy | The Pensions Regulator

    Consideration of social risks and opportunities by occupational pension schemes – GOV.UK (www.gov.uk)

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    • Published byClár Christie

      Clár graduated with First Class Honours in Actuarial Science and Risk Management from Queens University Belfast in 2017. As a member of the Actuarial and Investment team, Clár is involved in a wide range of areas within the pensions sector incorporating...

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