Government says pensions trustees must consider ‘ESG’ factors

Written by Rebecca O'Connor on 11th Sep 2018

The UK government has today published changes to the regulations that govern how pension trustees consider environmental, social and governance (ESG) factors in their investment decisions. The new regulations also cover how trustees should address pension savers’ ethical concerns and wider interests.   

Under the new regulations, the majority of trustees will be required to explain their approach to ESG factors, stewardship of investments, and ethical issues. Many will also be required to report annually to pension scheme members on what they have done to implement their approach to these subjects. 

ShareAction, the investment campaign group, as well as the UK Sustainable Investment and Finance Association, have argued that the law should clearly state that pension schemes are required to address the financial risks posed by a wide range of environmental, social and governance factors, notably climate change. 

Up to now, pension fund trustees have been encouraged but not required to consider these factors.

The legal mandate to do so is important, as for years, pension fund trustees were obliged to only consider the financial outcome of their choices, which meant they were wary of including ESG concerns, without an explicit reason to do so.

However as a result of work from think tanks such as Carbon Tracker and others, the case has clearly been made that ESG considerations do materially impact financial performance over the long term.


There is no trade-off between consideration of sustainability factors and good returns – in fact sustainable and responsible investment has been shown to enhance returns to the benefit of savers, investors and the wider economy.

Fergus Moffatt, policy director, UKSIF

For the millions of people enrolled into defined contribution pension schemes over the last few years as a result of pensions auto-enrolment, the new regulations bring a much-needed new level of long-term risk protection. They also pave the way for members of UK pension schemes to be heard on ethical investment issues that matter to them.  

The DWP opened up its consultation process on these regulations to regular pension savers, receiving a substantial response from over 3,400 individuals, the vast majority of whom signalled their strong support for the changes that are now being introduced to the UK’s pension regulations.  

Catherine Howarth, Chief Executive at ShareAction, said: “This is a major development, for which we have long fought, and we commend the government on this action to protect UK pension savers.

“Working people in the UK deserve 21st century risk management of their retirement assets and investment strategies that anticipate the impacts on portfolios of issues like climate change. They also deserve to be heard by the trustees and investment professionals looking after their savings.

“These regulations are a big step forward in shifting the culture and practice of the UK pensions sector, and we warmly welcome them. It is now over to the FCA to ensure savers in schemes it regulates are given similar information and protection.”

Simon Howard, Chief Executive, UKSIF said:“UKSIF has been working hard for this result over the past few years so we couldn’t be more delighted. As UKSIF members already know ESG factors are often financially material and consideration helps to mitigate risk and enhance value – these new regulations will help bring those still unclear about the financial benefits of ESG up to speed and help to put mainstream financial services on a much more sustainable footing.”

Fergus Moffatt, Programme Director and Head of Public Policy, UKSIF said: “We welcome the Government’s decision to implement the Law Commission’s recommendations and will require schemes to consider financially material environmental, social and governance factors, including climate change.

There is no trade-off between consideration of sustainability factors and good returns – in fact sustainable and responsible investment has been shown to enhance returns to the benefit of savers, investors and the wider economy.

Our own research has shown that 90 per cent of fund managers expect climate risk to significantly impact the valuation of oil companies over the next two years, so it is vital asset owners are aware of and responding to such risks. The new regulations send a strong message throughout the entire investment chain that sustainability factors must be considered.”

The new rules

By October 2019:

  • Where schemes are required to produce a Statement of Investment Principles (SIP), update or prepare it to set out:
    • How they take account of financially material considerations over the appropriate time horizon, including (but not limited to) those arising from Environmental, Social and Governance considerations, including climate change;
    • The extent (if at all) to which non-financial matters are taken into account.
    • Their policies in relation to the stewardship of investments, including engagement with investee firms and the exercise of the voting rights associated with the investment
  • In relation to relevant schemes – broadly, schemes offering money purchase benefits, subject to a few exceptions:
    • To publish their Statement of Investment Principles on a website so that it can be found and read by both scheme members and interested members of the public, and inform scheme members of its availability via the annual benefit statement;
  • In relation to the default arrangement, prepare or update their default strategy to set out how they take account of financially material considerations, including (but not limited to) those arising from Environmental, Social and Governance risks, including climate change.

From October 2019:

  • When they next prepare or update their Statement of Investment Principles, they prepare a separate ‘statement on member’s views’, setting out how they will take account of the views which, in their opinion, members hold, in relation to the matters covered in the Statement of Investment Principles. In addition, we proposed to require trustees of relevant schemes to publish that statement.

From October 2020:

  • Produce an implementation statement setting out how they acted on the principles they set out, and how they acted on the statement which covered how they would take account of the views which, in their opinion, members hold;
  • Publish that implementation statement online in the same way as the Statement of Investment Principles, and inform scheme members of its availability via the annual benefit statement.

 

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