DB trustees urged to consider ESG credentials in insurer selection process

Defined benefit (DB) pension scheme trustees should boost their understanding of the role of environmental, social and governance (ESG) considerations and data when targeting buy-ins and buyouts, Hymans Robertson has said.

The consultancy said that while it is good to see a growing focus in this area, with ESG capabilities of insurers moving up the priority list for DB trustees, it is important that trustees have a “critical understanding” of the role ESG can play when targeting buy-ins and buyouts.

In particular, the report, Spotlight: ESG in Risk Transfer Transactions, suggested that trustees need insight into how insurers have integrated the consideration of ESG factors in their business processes, business oversight and resource allocation.

The report also outlined four specific areas of responsible investment that trustees should use to assess which potential insurer to partner with: culture, integration, stewardship and transparency.

Hymans Robertson head of ESG for risk transfer, Paul Hewitson, commented: “A DB trustee’s key duty is to act in the best interests of its members and, for those pension schemes targeting buy-out, part of that is to partner with insurers they believe can fulfil the responsibility of paying its members’ benefits long into the future.

"With the introduction of climate regulations, trustees are now required to consider the risks and opportunities for their scheme that climate change will bring over appropriate short, medium and long-term time periods.

“As it’s likely that emerging risks like climate change could also affect insurers’ future financial strength, Trustees should take the time to understand how an insurer integrates ESG factors and climate-related risks into their standard processes and investment decision making.

"They can then compare an insurers’ approach with their own scheme’s, which will ultimately help them to feel reassured that any risk transfer transaction will be in the best interest of members in the long-term."

Hewitson also suggested that as insurers continue to focus on responsible investment factors and follow the recommended information disclosures, trustees will have even more information to identify differences and benchmark potential partners.

“Insurers are making disclosures on things like the way they invest in socially beneficial projects and low carbon initiatives, how they reject investments involved in controversial activities, or how they actively engage with companies they invest in to drive positive changes from an ESG perspective," he added.

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