Pension schemes too focused on minimum ESG requirements

August 1st, 2024

The Pensions Regulator (TPR) found that many pension trustees are only delivering on the minimum requirements for the ESG duties.

The UK regulator’s Market Oversight: ESG report found that “too many” smaller schemes had opted for minimum compliance with ESG aspects of their statements of investment principles (SIPs) and implementation statements (IS).

It recommended that trustees consider consolidating their scheme if they feel they lack the expertise or scale to be able manage financially material ESG risks effectively, to improve the way in which these risks are managed.

It also urged trustees to provide more evidence of their oversight in cases where management of financially material risks, engagement and voting had been delegated to an investment manager.

The report assessed around 3,500 scheme returns from defined contribution, defined benefit and hybrid schemes.

For pooled schemes, it found that there were still options for trustees to show active engagement and advocate for their scheme’s ESG policies, such as requesting that asset managers vote on issues in a way consistent with the trustees’ own stewardship priorities or joining collaborative investor initiatives.

However, the report also found many trustees are meeting their duties overall, with only 1% failing to provide a weblink to relevant ESG disclosures.

Mark Hill, climate and sustainability lead at TPR, said: “A focus on compliance only is a missed opportunity. Trustees should aim to fully demonstrate their engagement with material ESG considerations whether climate impact, nature loss or social factors and invite challenge in the interest of protecting outcomes for savers.

“As ESG disclosure reporting requirements are likely to continue to expand, trustees may wish to voluntarily become early adopters of reporting requirements relating to, for example, nature, biodiversity and social factors.”