Our research shows the vast majority of trustees meet their environmental, social and governance (ESG) duties including in respect to climate change. This is a good thing. But a deeper analysis from our review of statements of investment principles (SIPs) and implementation statements (ISs) also shows many schemes only achieve minimum competence. This will not be enough to further improve portfolio resilience and deliver better outcomes for savers.
By using machine-reading techniques, supplemented by TPR staff, we were able to review SIPs and ISs from around 375 schemes. We also carried out an in-depth review of those disclosures from around 50 schemes. The resulting study highlighted several recommendations we want trustees to consider and showed there’s still work to do. ESG factors can be financially material to pension schemes. We want savers’ pots to be protected, and trustees are encouraged to make strategic decisions and take actions that take ESG factors into account.
The ESG and climate disclosures which schemes publish, should be the product of the strategic decisions and actions trustees have taken to protect savers’ outcomes from risk. They should also demonstrate what trustees have done to take advantage of the opportunities presented by the UK’s ambition to transition to a net zero economy by 2050. But disclosure alone is not enough. Considering ESG factors as part of a scheme’s wider decision-making is vital to protect savers’ pensions. It should be business as usual for trustees, not something considered only when it’s time to complete a report.
Taking action
Through our Market Oversight directorate, we will look more broadly at investment governance practice and decision-making including around ESG. We will constructively challenge trustees’ decision-making so we can be assured savers’ interests are being met. This is an opportunity for trustees to work with advisers to develop their understanding, embrace best practice and maximise the opportunities while mitigating the risks material climate change and ESG factors present.
While trustees do not need to be climate change experts, they should have sufficient knowledge and understanding to be able to identify, assess and manage climate-related risks and opportunities for their scheme. And they need to be sufficiently knowledgeable to confidently question and challenge the advice they receive in the interests of savers.
Support for schemes
While we want wider ESG and climate change to be embedded into scheme decision making, we also want trustees to be able to easily find the support they need to do that. Our website sees one million users a year. To help them find the material they need we are trialling bringing all our ESG and climate material into one place. This includes:
codes of practice on:
climate change
stewardship
guidance on:
climate-related governance and reporting
defined benefit investment
defined contribution investment guidance
what TPR is doing on ESG, including:
our climate change strategy
our climate adaptation report
our net zero report
links to external resources
We have already embedded relevant material on ESG into our popular Trustee Toolkit (TTK) to help new trustees, and those looking to refresh their knowledge, meet their ESG duties. Taking a phased approach between now and next spring, we have begun refreshing the TTK’s look, feel and content. This will include reviewing ESG content in our introduction to investment module, which has already been completed by 1,434 people in the past year, including information on stewardship, SIPs and annual climate reporting regulations. We are keen to work with industry to understand what works best. Trustees can provide feedback on this approach by emailing webfeedback@tpr.gov.uk.
I’d urge trustees to use the material on our landing page to ensure they are doing everything they should to manage ESG factors and climate change risks in savers’ interests.
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