Occupational pension schemes in the UK have been subject to new and increasing regulation in recent years in relation to how they take account of environmental, social and governance (ESG) considerations in their investments.

The regulations include requirements both in relation to the internal governance processes of those arrangements, and disclosure obligations which require the public disclosure of how the trustees of those arrangements have met the new requirements.

Since 1 October 2019, trustees have had to set out in their Statement of Investment Principles how they take account of “financially material considerations”, which include ESG considerations, as well as their policies in relation to the stewardship of investments, including voting rights.

This represented a shift in regulation, as previously trustees only had to set out the extent to which, if at all, ESG considerations were taken into account. The new requirements therefore started from the position that trustees do take ESG considerations into account.

From 1 October 2020, trustees had to produce an Implementation Statement setting out the extent to which they have followed their policies on engagement in their Statement of Investment Principles and the exercise of voting rights, and a description of their voting behaviour including their most significant votes.

Both the Statement of Investment Principles and Implementation Statement must be published and publicly available, meaning for the first time members have a genuine ‘looking glass’ into schemes’ governance and strategies in relation to ESG matters.

In addition, new regulations introduced this year in October 2021 require large occupational pension schemes with assets of over £5bn, authorised master trusts and collective DC schemes to align their governance and disclosure processes with the recommendations of the Task Force on Climate-Related Financial Disclosures.

These requirements apply specifically to climate change, and will also apply to mid-sized pension arrangements with assets exceeding £1bn from 1 October 2022.

Broadly, these obligations require trustees to put in place governance, strategy and risk management processes to identify, assess and manage climate-related risks and opportunities, to select and measure against appropriate climate change targets and metrics and to provide free-to-access public disclosure on the steps they are taking in this respect.

These requirements are detailed, and in particular require trustees to gather significant amounts of data from their investment and fund managers. There is regulatory acknowledgement that full compliance may not be possible in the early years of compliance, particularly due to the difficulty many trustees will have to collect all of the necessary data, though we expect the initial leniency to wane over time as the availability of data improves.

The regulatory intention of these requirements is not to dictate the investments that these pension arrangements can or cannot make, but rather to encourage positive change by ensuring that ESG issues form part of the overall governance, strategy and risk management of these arrangements, and to require public disclosure of the steps trustees are taking in this regard.

The reports produced by the pension arrangements’ trustees for the purposes of the new climate change requirements must be published and specifically brought to the attention of members of these arrangements, as well as to The Pensions Regulator. They are intended to be easily understood and accessible to members, so that members can properly engage with, and potentially scrutinise and query, the steps their pension arrangement is taking in relation to climate change in particular.

We expect this to remain an area of legislative and regulatory focus, and it will be important for trustees to remain on top of the latest developments. While the most recent focus has undoubtedly been on climate change, trustees should remember that this is just a part of the “E” in ESG, and their obligations remain broader than this.

Indeed, we expect the regulatory focus to broaden in the future, and issues such as stewardship (in relation to which the government perceives trustees’ governance and disclosures to be weakest) may return to the fore.

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