In producing this guide and to assist with bringing some clarity, the SPP has collaborated with the Employer Covenant Practitioners Association (ECPA) to bring separate insight to the key topics of climate change and ESG which the SPP has observed have become increasingly and unhelpfully conflated over recent years. The ECPA published a paper in February 2022 exploring specifically the impact of Climate Change on the employer covenant. This new paper by the SPP focuses on the wider universe of ESG considerations, while touching on climate change.
In the guide, the SPP has emphasised the following key topics requiring improvement in the proposed rules, focusing on two key areas:
Effect on employers
• The SPP Covenant Committee considers that it is essential that trustees of UK defined benefit pension schemes and their advisers assess and monitor ESG risks in relation to the employer covenant and whether such risks have the potential to disrupt a scheme’s funding journey. Which they believe is fully aligned to a trustee’s fiduciary duty.
• ESG risks and opportunities can impact both the employer’s financial capacity (its ability to underwrite the needs of the pension scheme over time) and its sponsor longevity (the time horizon over which the employer may be required/available to underwrite the pension scheme).
• Whilst it is important to understand climate change and ESG opportunity, from a covenant perspective downside risk is a far more important consideration.
Effect on trustees
• The SPP believes that trustees and advisers should assess the scope of ESG risk for their scheme’s sponsor proportionately. ESG factors should be evaluated within the context of the scheme’s current and future need for support.
• A scheme moving to buy-out within five years will have very different considerations from a scheme that remains open, or one that places reliance on the sponsor long into the future.
• Whilst ESG ratings are available for some (typically larger and/or publicly listed) sponsors, these are a useful input but not a substitute for proper understanding of the relevant risks. ESG ratings are produced for a different purpose and with a different lens to the trustee covenant lens.
Jane Evans, SPP member writes: “Heightened awareness and action on the climate emergency, social issues and the Covid pandemic have all played their part in accelerating interest in areas of risk that tend to sit outside a company’s balance sheet. ESG has become the catch-all term for a wide basket of risks including, but not limited to, climate change.
“Navigating these issues has been a particular challenge for many in the pensions industry, not least scheme trustees, who are having to stay abreast with the latest developments. Fortunately, the industry is rising to the challenge and is increasingly able to provide the right support to trustees to help them manage the issues surrounding ESG and covenant. Our hope is that this guide furthers that endeavour.”
SPP Ppaer ESG Impact in the Employer Covenant
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