The vast majority (98 per cent) of defined benefit (DB) pension scheme trustees view environmental, social and governance (ESG) integration as a pressing priority for the year ahead, industry research has revealed.

The survey, commissioned by River and Mercantile and conducted by the Pensions Management Institute (PMI), also found 95 per cent of DB scheme trustees viewed understanding the ESG approach investment managers are taking during portfolio construction and stock selection as key.

The report explained that this would require a progressive improvement in transparent reporting, with supporting narrative to explain or justify the decisions taken from an ESG perspective and the impact on performance.

It emphasised that this would not only improve the level of trustee governance, but would also empower trustees with better tools to engage and ensure alignment with their providers.

More broadly, it highlighted the importance of trustees considering the impact of climate-risk on their portfolio, recommending that schemes consider carbon footprint and greenhouse gas metrics based on their current portfolio as a starting point.

However, the research also found that one in 10 DB pension scheme trustees believed that setting environmental, social and governance (ESG) objectives was not a pressing concern.

Whilst it clarified that the 10 per cent in question may have already set their ESG objectives, it also acknowledged that there are "competing priorities" facing trustees, such as covenant strength and deficit funding.

However, it emphasised that the impact of climate change should not just be an investment risk question, but should also take into account covenant risk.

It stated: “Covenant strength is front of mind for many trustees today, however we will emerge from 2020 and attention and timeframes will start to expand.

“As they do, trustee attention should turn to the durability of the covenant (whether directly or the underlying sector) and the extent that climate risk management has been incorporated into the sponsor’s long-term plan and therefore ability to support the pension scheme.”

The survey was commissioned as part of a wider research report, which also found that the vast majority (95.7 per cent) of DB trustees believe they need to consider re-aligning their investment strategy following a "challenging" year, whilst more than three-quarters (79.8 per cent) believed that Covid-19 has signalled the end of the quarterly meeting cycle.

The report follow the launch of the Investment Consultants Sustainability Working Group guide, which aims to support trustees in assessing their investment consultants on climate competency, and government confirmation of new climate risk governance and reporting requirements for larger schemes.

It also follows the recent government confirmation that larger pension schemes, those with more than £5bn in assets and authorised mater trusts, will face new climate risk governance and reporting requirements.

Defined contribution schemes have also recently come under pressure to take greater action on ESG issues, after research from The Pensions Regulator revealed that 21 per cent of DC trustees felt that climate change was not relevant to their scheme.

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