INSIGHT by Lauren Wilkinson, Senior Policy Researcher, Pensions Policy Institute (PPI)
| Environmental, Social and Governance (ESG) risk-factors are becoming an increasingly important part of the investment decisions that UK trustees and pension providers must make. Not only are the financial implications of ESG factors becoming more apparent to UK investors, but regulation is also guiding them in this direction, at some speed.
October 2020 marks one year since trust-based Defined Contribution (DC) schemes in the UK have been required to set out, in their Statement of Investment Principles (SIP), their policies in relation to ‘financially material considerations’, which includes ESG risk factors. It will also bring new regulations strengthening these requirements, with schemes required to produce implementation statements explaining how they have followed and acted upon the stated investment principles set out in their SIP. This includes reporting on the way in which the scheme monitors its asset managers who undertake investment and engagement activities on its behalf and whether these managers have acted in accordance with the trustees’ stated policies.
On top of these existing regulations, the Department for Work and Pensions (DWP) is currently consulting on policy proposals to require trustees of larger occupational pension schemes to address climate change risks and opportunities through effective governance and risk management measures, in line with recommendations made by the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).
Despite changes in regulation strongly encouraging trustees and providers to become more informed on ESG issues, there are concerns that some schemes are still not engaging with these considerations in a meaningful way.
Whether or not schemes have outsourced their day-to-day investment decisions to an external asset manager, schemes still have the responsibility to monitor engagement and stewardship activities being undertaken on their behalf, and should have an established scheme policy on ESG issues.
While there are plenty of approaches available to DC schemes trying to incorporate ESG considerations into their investment strategy, the reality is that this is a complex undertaking, compounded by the fact that there is still a lack of consensus regarding how to define and implement ESG.
There are a number of key factors that must be considered when designing an ESG strategy, including the level of financial risk-mitigation offered by the approach, as well as the cost and governance requirements associated with implementing it. Developing an appropriate strategy is particularly challenging for those trustees who still have low levels of knowledge and understanding of ESG issues. Trustees may therefore need more support to identify the practical steps they can take in order to comply with regulation and protect members appropriately from the long-term risks these considerations represent.
PPI is currently undertaking a research series on ESG issues which will identify where there may be gaps in method and approach, as well as possible avenues for greater engagement and the support that schemes may need to achieve this. The series will include three publications to be released over 2020 and 2021.
| brief bio
Lauren Wilkinson is a Senior Policy Researcher at the Pensions Policy Institute, having joined as a Policy Researcher in September 2016. During her time at the PPI, Lauren has produced research on a range of topics, including Defined Benefit, consumer engagement, pension flexibilities and Collective Defined Contribution. Alongside producing and presenting research, Lauren also delivers training as part of PPI’s Knowledge Sharing Seminars, providing an introduction to the pensions landscape for new members of the industry. Prior to joining the PPI, Lauren studied Politics and Philosophy at the University of Glasgow, followed by a Masters in Public Administration and Public Policy at the University of York.
Pensions Policy Institute (PPI) is an independent educational research charity and does not lobby for any particular solution.
We are not a think-tank taking politically influenced views. The PPI is an educational research charity, which provides non-political, independent comment and analysis on policy on pensions and retirement income provision in the UK. Its aim is to improve the information and understanding about pensions policy and retirement income provision through research and analysis, discussion and publication. Further information on the PPI is available on our website www.pensionspolicyinstitute.org.uk.
| All opinions expressed are those of the author. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.