It is great to see the positive impact that greater understanding of environmental, social, and governance (ESG) issues is having in the pensions industry, as more trustees are becoming aware of these factors and how they can impact their schemes. However, it could be argued that there is too much focus on the ‘E’.
Environmental issues, naturally, affect us all and we are now seeing significant impacts from climate change. In July 2021, Europe witnessed a huge range of extreme weather, from a heat wave in the UK with many parts of the country hitting record temperatures, turning almost immediately to flash floods in London, and devastating floods in Belgium and Germany. Such events are well covered by the media and remind us of the need to consider the “E” in ESG and the role we have in reducing climate change.
The new mandatory requirements affecting large pension schemes mean that trustee attention has also focused heavily on environmental issues; trustees will need to produce a Taskforce on Climate-related Financial Disclosures (TCFD) reports. The TCFD reports cover a range of important points and are intended to lead to better and more informed decision making on climate risks. The increase in transparency is intended to improve accountability and provide decision-useful information to investors and, ultimately, beneficiaries. Therefore, it is no surprise climate change is high on the trustee agenda.
The increased and, arguably, too heavily weighted focus on “E” by trustees has been recognised by Guy Opperman, Minister for Pensions and Financial Inclusion. He recently reminded trustees that the law requires them to take account of financially material environmental, social and governance considerations, and that poor governance in a company may contribute to poor performance on environmental and social consideration. In June 2021, The Pensions Regulator (TPR) announced its new Equality, Diversity and Inclusion Strategy, which includes increasing the diversity of pension scheme boards and having more women in technical roles. This step by the TPR sends a message of the growing expectation to focus ESG on more than just climate change.
Trustees should recognise that multi-faceted approaches are needed to if they are to consider ESG properly. With that in mind, trustees should allocate to asset managers which share this belief and can demonstrate how they incorporate all sections of ESG into investment decisions and engagement with companies. As trustees report on their ESG actions through the annual and publicly available Implementation Statement, it is important all aspect of ESG are covered.
Trustees considering how they can integrate ESG factors into their scheme, should recognise the wide range of components to which they can have a positive influence on over the long-term, and not get too focused on short-term factors driven by the media or regulation. If trustees are interested in learning more about how they can integrate ESG into their scheme, or require any further information, please feel free to contact your investment consultant.