ESG has moved up the pension trustee agenda – are you ready? 13 February 2020

It seems that climate change awareness and interest in environmental, social and governance (ESG) issues among investors, politicians, millennials and society at large has reached a tipping point. This has led to new pressures and subsequent regulations, but also to new opportunities for all stakeholders involved.


 

The Gowling WLG ESG Working Group has been established to help our pension trustee clients understand the law relating to ESG and to help them navigate the landscape, including the social and political backdrop, as it evolves.

This is the first of a series of ESG-focused Insights to be published by our ESG Working Group. In this Insight, we highlight recent remarks by Guy Opperman and Mark Carney on climate change and pension schemes, we touch on new reporting and disclosure requirements for pension scheme trustees, and we finish by summarising key issues and questions for trustees to consider.

In future Insights, we will consider further the legal position for trustees in terms of statute and case law, for both defined benefit and defined contribution schemes, and discuss the practical implementation of compliance for schemes of all sizes.

Considerable political and commercial momentum behind ESG

Two weeks ago, Guy Opperman, Minister for Pensions and Financial Inclusion, confirmed that the Government intends to publish guidance on climate-related disclosures for pension schemes in March 2020. Mr Opperman said:

"With over £1.6 trillion in assets, UK occupational pension schemes have a significant role to play in supporting the Government's commitment to net zero by 2050. Our environmental, social and governance regulations, introduced by this Conservative Government in October 2019, mean that schemes are now required to disclose their policy on climate change. In March, we intend to publish game-changing guidance on climate-related financial disclosure."

We look forward to seeing this guidance and plan to share our thoughts on it in a future Insight. So, watch this space.

In December 2019, Mark Carney, Bank of England Governor issued a warning on climate change in an interview for BBC Radio 4. He urged investors to reconsider their agenda on climate change. He noted that unless firms address "the climate crisis", pension fund investments could become "worthless". He said:

"A question for every company, every financial institution, every asset manager, pension fund or insurer: What's your plan?"

These comments and others from authoritative figures across the globe speak to the considerable and growing political and commercial momentum behind ESG.

ESG is shaping new investment governance and disclosure requirements

On 1 October 2019, new provisions came into force on statement of investment principles (SIPs), stewardship and financially material considerations.

These new regulations do not dramatically change the underlying duties of pension trustees when they are investing scheme assets. Pension trustees are still under a duty to invest scheme assets in the best interest of the members and beneficiaries with a view to providing the benefits set out in the scheme rules. However, they are intended to better address concerns relating to:

  • ESG; and
  • stewardship (including voting, engagement and monitoring).

We have previously published a more detailed Insight on these developments, so please read this for further information - Trustee investment duties: All change or more of the same.

The UK Sustainable and Finance Association's Report dated February 2020 challenged trustees of defined contribution arrangements over "the poor rate of compliance with the ESG regulations". We can expect to see greater scrutiny over trustee compliance in the coming months and years.

Some issues and questions for trustees

Knowledge of the legal requirements:

  • Do you feel confident that you understand your legal duties regarding ESG?
  • What can you delegate to your investment managers?
  • How far does wider societal impact actually matter?
  • Does your own scheme's expected timescale (e.g. to buy-out) impact your approach?

Investment managers adopt varying approaches to ESG:

  • Do you feel confident that your investment manager is prioritising ESG effectively?
  • Are they transparent about their ESG approach?
  • Do you know what methodologies they use?

Exercising stewardship activities:

  • Are you engaged in discussions around your rights as shareholders and how your shares are being voted on ESG issues, such as climate change, and executive remuneration?
  • Are you clear about your investment managers' and custodian's decision-making about using your voting rights?

Requests from members and activist groups:

  • Do you know what your members think about ESG investing? Does it matter?
  • Are you ready to deal with requests from members or activist groups about your approach to ESG?

'Greenwashing' is an increasing concern in the financial sector:

  • Do you know what 'greenwashing' is and the risks involved?
  • Are you confident you or your managers know what it is and how to detect it?

Conclusion

It seems clear that 2020 is the year that ESG goes mainstream across the pensions industry. For those of you who are pension scheme trustees, it is now imperative to understand precisely what the law requires of you and how, in practice, you will comply.