Written by Sophie Kirk
Introduction
The Pensions Regulator (“TPR”) has recently published a report titled “Market Oversight: Review of trustee compliance with environmental, social and governance duties” which provides a detailed assessment of the steps that pension scheme trustees are taking to fulfil their Environmental, Social and Governance (“ESG”) responsibilities. The purpose of the report was to give an overview of the steps which should be taken by trustees in order to meet their ESG obligations and is particularly relevant given the growing emphasis on sustainable investing and the integration of ESG factors into financial decision-making.
You can access the report here.
Summary of TPR’s report
As mentioned above, this report focused on several key areas of trustee performance in relation to ESG duties. The overarching conclusion was that the majority of trustees are only taking steps to ensure that they reach the minimum compliance requirements. The report found that there is a noticeable lack of depth and detail in many scheme policies in relation to ESG and it emphasised the importance of trustees moving beyond the stance of mere compliance to demonstrate a more substantial integration of ESG factors into their investment strategies.
Trustees have a fiduciary duty to act in the best interests of their members and as such, their scheme’s investment strategy must balance the duty to protect member benefits while also generating good returns. As part of this, trustees also must consider and take steps to address factors which may impact their investments (such as climate change).
ESG disclosure requirements set out that trustees of pension schemes with a certain number of members must produce Statements of Investment Principles (“SIPs”) and Implementation Statements (“ISs”) to provide their members with details of the actions taken in considering and reacting to ESG risks. TPR’s report highlighted that although most schemes have produced these documents, many are lacking specific detail and the report emphasised that further steps should be taken by trustees to demonstrate a more thorough understanding of ESG factors and how this is being taken into account with their investment strategies. Mark Hill, Climate and Sustainability Lead at TPR, reiterated this point, stating that “A focus on compliance only is a missed opportunity”.
TPR’s report also noted that many trustees appear to adopt a “hands-off” approach to ESG and instead rely heavily on their investment managers to ensure that their strategies align with the necessary ESG requirements, often without any steps to ensure there is engagement with specific ESG-related risks and opportunities. The report was clear that “Trustees must take ownership of the scheme’s policies in relation to ESG. It is not enough for trustees to report that they have delegated these matters to asset managers”. The report also encouraged trustees to provide more detailed and scheme-specific information on the risks to their scheme, on voting activity and on asset management arrangements. It argued that this detailed disclosure is essential for demonstrating that trustees are actively managing ESG risks while also fulfilling their duties to scheme members.
Overall, TPR’s report serves as a call to action for pension trustees to enhance their ESG practices, moving beyond minimum compliance and adopting a more proactive and integrated approach to ESG risk management. By doing so, trustees can better protect the long-term interests of their members while contributing to broader societal and environmental goals.
How we can help
In the future, we expect TPR will require increased engagement from trustees on ESG issues and therefore believe that all trustees should be taking steps to understand how they can better address ESG-related risks and opportunities for their pensions.
Burges Salmon are well placed to advise on all aspects of ESG in relation to pension schemes and we have upgraded our Pension Schemes ESG tool to assist trustees and employers navigate the ever-evolving nature of ESG engagement and compliance. Access to this tool can be requested here. If you would like to discuss any elements of ESG requirements or compliance further, please contact Kate Granville Smith.
While the vast majority of trustees are meeting their ESG-related disclosure requirements, our deeper analysis shows many are only delivering minimum compliance