ESG and pensions in 2023 – five key things to focus on

Jason Coates

1 year ago

Much of the attention on ESG for pension schemes has been at the very large scheme level, where assets held are in excess of £1 billion.

However, ESG, and the risks and opportunities relating to it, are just as important for DB schemes with assets below that level. But with so much written about ESG and pension schemes, it is often difficult to know where to start and where to focus. To help you, we have set out what we consider to be the five key things for 2023.

Terms used in this post

DWP – Department for Work and Pensions

ESG – Environmental, social and governance

TCFD – Task Force on Climate-Related Financial Disclosures

TPR – The Pensions Regulator

1

Remember the basics

It is important to remember that ESG risks and opportunities fall within your general trustee duties. ESG shouldn’t be seen as something that somehow sits outside those duties, but something which is very much integral to them.

In particular, when exercising your investment discretion, consideration needs to be given to the ESG-related aspects of the investment choices you have and the decisions you make. Primarily, this should be seen through a financial lens.

How do ESG factors impact the likely financial outcomes over the relevant time-horizons?

Spend some time with your trustee board this year considering the trustee’s own beliefs in respect of ESG and engage your investment consultant to take a holistic and proportionate view of the subject.

2

Get to grips with Implementation Statements

This is a ‘must do’. If you are a scheme with over 100 members, you already have a legal obligation in terms of what you need to say in your annual report and accounts.

This requires you to explain how action has followed intent in respect of what you have said in your statement of investment principles (SIP) in respect of voting rights, even where this is effectively done through your fund managers. It is a way of ensuring you do more than pay lip service to statements made in the SIP, for example in respect of important stewardship issues such as climate change, biodiversity and modern slavery.

In respect of this, you must take into consideration the statutory guidance (updated in June 2022) (particularly paragraphs 67 to 94) (see Links section below).

You need to demonstrate that you have had regard to this guidance, for example by providing any reasons for divergence where the guidance says the trustee ‘should’ do something.

3

Be prepared for TPR’s Single Code and ‘own-risk assessment’

This will soon be a ‘must do’ as we expect TPR’s Single Code of Practice to become a reality in the first part of 2023.

There are elements of the draft Code which deal with ESG and as the Code applies to all schemes, not just the largest, you will need to review your approach to ESG and, in particular, climate change. As soon as the Code is issued, you will need to take steps to comply.

The key areas for review in this context will be the modules on climate change and stewardship, including how you take climate and environmental risks into account and how you engage with managers on ESG and stewardship matters.

Furthermore, it seems likely that the ‘own-risk assessment’ (ORA), which you will need to carry out within 12 months of the Code coming into force, will have an element in it requiring you to consider the effectiveness of the trustee board’s assessment of investment risks relating to climate change, the use of resources and the environment, as well as how it assesses social risks.

4

Take into account TPR’s guidance on TCFD reporting

Not yet a ‘must do’, but one to consider. There are already legal requirements on schemes with over £1 billion in asset value to put in place governance and reporting in line with the Task-Force on Climate-related Financial Disclosures (TCFD).

While your scheme may not currently be required to comply with this legislation, it may well be required to do so before too long as the regulations can be extended to cover schemes with assets below £1 billion.

In any event, TPR guidance encourages you to consider taking voluntary steps as are proportionate and useful and to use its guidance to help you.

5

Consider ESG as part of risk transfer

Many schemes are looking to execute risk transfer transactions with insurers and 2023 looks set to break records.

There will be a number of factors a trustee board will want to take into account when considering which counter-party to choose for its buy-in, buy-out or other risk transfer solution. ESG credentials should be one of those factors.

Many of the consultants have written pieces on this and the counter-parties will be keen to tell you about their approach to ESG matters.

We’ve provided one example of a piece on this topic in the links section, but you will find many others across the industry and you should speak to your advisers about the work they have done on this.