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Pension Fund Trustees Need To Widen Their ESG Focus To Fully Capture Both The Risks And Opportunities

Pension Fund Trustees Need To Widen Their ESG Focus To Fully Capture Both The Risks And Opportunities

Tuesday, 30 April 2024

A recent blog by Mark Hill, Climate and Sustainability Lead at The Pensions Regulator (TPR), has challenged pension fund trustees to widen the scope of their environmental, social and governance (ESG) reporting beyond climate change, and recommended they start embracing nature and social factors within their scheme policies.

ESG disclosure reporting for pension fund trustees in the UK has become more extensive in recent years. Since 2019, it has been obligatory for trustees to include a policy on financially material ESG considerations within their Statement of Investment Principles (SIP), outlining whether any ESG factors could have an impact – positive or negative – on investment returns. In 2020, trustees were instructed to publish their own annual Implementation Statement, explaining how their SIP policies were being implemented.

More recently, the Pension Schemes Act 2021 introduced a phased approach to mandatory climate-related reporting requirements. Larger schemes with assets valued at more than £1bn and authorised schemes are required to publish annual reports aligned with the Taskforce for Climate-Related Financial Disclosures (TCFD) framework, the TCFD’s work is now complete. The ISSB is working to support effective implementation of IFRS S1 and IFRS S2, which provide for a global baseline of sustainability-related disclosures worldwide, including capacity building and monitoring progress towards the broad use of high-quality disclosures, further details can be found here.

Has ESG reporting now become ‘business as usual’ for trustees?

Because of these changes, ESG disclosure reporting has become a central responsibility for pension fund trustees in the UK. Trustees now must not only consider ESG factors in their investment decisions but also must be able to clearly and accurately report their ESG methodology and engagements. This has helped to improve the quality of reporting for most pension trustees, something which Mark Hill is quick to point out, “The first tranches of climate reports show what can be achieved with the right framework, guidance and regulation. There is increased awareness, debate and a better understanding of climate-related risks and opportunities in the pensions market, and potential transition pathways to more sustainable investment.”

However, given the number of new initiatives introduced more recently, Mark Hill argues that trustees must continue to adapt by becoming more familiar with – and indeed embracing – a new set of ESG-related reporting requirements and recommendations. These include the Taskforce for Nature-related Financial Disclosures (TNFD), the UK Transition Plan Taskforce (TPT) and the Taskforce for Social Factors (TSF). Crucially these initiatives move the focus of ESG reporting requirements beyond that of just climate change, and trustees need to be mindful of incorporating wider sustainability factors – such as nature and social factors - as these initiatives develop.

Mark Hill notes, “While there are no mandatory requirements to adopt recommendations from the UK Transition Plan Taskforce (TPT), Taskforce for Nature-related Financial Disclosures (TNFD) or Taskforce for Social Factors (TSF), trustees would do well to familiarise themselves with them.” Trustees familiarising themselves with these initiatives can stay ahead of potential future regulations and position themselves as leaders in responsible investing. As Mark Hill explains, “Pensions operate in a complex world, and trustees are increasingly being asked to grapple with new risks and grasp new opportunities. But the role of a trustee fundamentally remains to act in members’ best interests… The goal is not disclosure for disclosure’s sake but to encourage genuine change in how schemes operate.”

What should trustees be doing?

While Mark Hill notes that adding nature and social factors to reporting may seem “daunting” to trustees, he notes it should be possible by incrementally building on the foundations of TCFD. And while lack of data remains an issue for trustees, it shouldn’t prevent trustees from taking action. Here are some of the actions he thinks trustees should already be considering:

  • Become early adopters - Many pension schemes have already committed to including TNFD reporting. Others are revising their SIPs and other policies to include nature-related risks and opportunities, based on their own investment beliefs
  • Build on TCFD experience - The process can be made easier by applying learnings from TCFD reporting, particularly by focusing on areas where steps can be implemented easily and have an immediate impact
  • Focus on initial actions that drive outcomes - Selecting and then focusing on specific themes can help trustees build knowledge, extend engagement with their investment and service providers, and ultimately drive progress
  • Encourage collaboration and share knowledge - Trustees should consider sharing knowledge on scenario analysis with groups such as Decision Useful Climate Scenarios (DUCS), the Climate Financial Risk Forum (CFRF) and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).

While reporting on all matters relating to ESG remains a significant challenge for trustees, it should be remembered that failing to account for the risks and opportunities presented by climate, nature and social factors puts pension scheme members at risk. Pension schemes will need to keep integrating these factors into their core operations and governance to remain fit for purpose and future-facing. As Mark Hill concludes, “The direction of travel is clear. The case for becoming familiar with TNFD and arguably requirements of the TPT and TSF will only become stronger.”

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