A report from The Pensions Regulator (TPR) in the UK highlighted “a missed opportunity” for most trustees to meet their ESG duties, as many achieve only minimum compliance.
A check of around 3,500 scheme returns from defined contribution (DC), defined benefit (DB) and hybrid schemes using a quantitative review showed that “too many” smaller schemes opted for minimum compliance with ESG aspects of statements of investment principles (SIPs) and implementation statements (ISs).
According to the regulator, 1% of schemes failed to provide weblinks to relevant ESG disclosures, and 2% of those links could not be accessed by TPR staff.
TPR also used machine-reading techniques to review SIPs and ISs from around 375 schemes, and an in-depth review of SIPs and ISs provided by around 50 schemes.
The regulator found that trustees often failed to demonstrate ownership of their policies or key activities in respect of ESG and where they delegated activities to managers, they often failed to explain or demonstrate oversight of ESG activities.
TPR’s report also noted that where schemes are invested in pooled funds, a number of trustees highlighted they had limited ability to influence underlying managers on decisions related to ESG.
The regulator said that if trustees believe they lack the expertise or scheme governance scale to be able to manage financially material ESG risks effectively, they should consider whether consolidating their schemes could improve the way in which these risks are managed for their members.
TPR also noted that it wants to see more evidence of trustee oversight where management of financially material risks, engagement and voting had been delegated to an investment manager.
Where schemes are invested in pooled funds, TPR said that there are still options for trustees to show active engagement and advocate for their schemes’ policies. These include requesting that asset managers vote on issues in a way consistent with the trustees’ own stewardship priorities or joining collaborative investor initiatives.
Mark Hill, climate and sustainability lead at TPR, said: “A focus on compliance only is a missed opportunity.”
He said that trustees should aim to fully demonstrate their engagement with material ESG considerations whether climate impact, nature loss or social factors and invite challenge in the interest of protecting outcomes for savers.
He pointed out that a vast majority (99%) of in-scope schemes provided weblinks to relevant ESG disclosures, however, the regulator found too many smaller schemes opted for minimum compliance in respect of the content of those disclosures.
Claire Jones, head of responsible investment at LCP, said the TPR’s report was a “welcome reminder” that trustees should not approach ESG as a tick-box compliance exercise.
“Many ESG factors are financially material, and trustees can – and should – play a vital role in ensuring they are appropriately taken into account in the way schemes’ assets are managed,” she said.
“TPR has provided a helpful reminder of various actions that trustees can take to improve the ESG integration and stewardship that their managers undertake on their behalf,” Jones noted, adding that trustees should view their annual ISs as an “opportunity to tell the outside world what actions they are taking”, and “demonstrate they are taking their responsibilities in this area seriously”.
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