Whilst most trustees are meeting their environmental, social and governance (ESG) duties, many are achieving only minimum compliance, a report from The Pensions Regulator (TPR) has revealed.

TPR’s latest ESG market oversight report showed that, of around 3,500 scheme returns from defined contribution (DC), defined benefit (DB) and hybrid schemes, only around 1 per cent failed to provide weblinks to relevant ESG disclosures, such as statements of investment principles (SIPs) and implementation statements (IS).

In addition to this, around 2 per cent of those links could not be accessed by TPR staff, although working links were requested from all schemes that provided one that could not be accessed.

However, the report found that trustees often failed to demonstrate ownership of their policies or key activities in respect of ESG.

Furthermore, where trustees delegated activities to managers, trustees often failed to explain or demonstrate oversight of ESG activities.

Given this, the regulator said it wants to see more evidence of trustee oversight where management of financially material risks, engagement and voting had been delegated to an investment manager.

TPR also raised concerns over smaller schemes, noting that whilst some smaller schemes produced some "very high-quality disclosures", too many smaller schemes have opted for minimum compliance with ESG aspects of SIPs and IS.

"While it's reasonable for trustees in scope to take a proportionate approach to ESG-related governance considerations, we urge them to consider whether only meeting minimum compliance with requirements is the most appropriate approach," TPR stated.

"Generally, trustees identified certain climate change and/or other ESG factors as financially material risk(s) to their investments. If a trustee considers these are financially material risks, then they need to consider what this means for saver outcomes."

The regulator also argued that, if trustees believe they lack the expertise or scheme governance scale to be able manage financially material ESG risks effectively, they should consider whether consolidating their schemes could improve the way in which these risks are managed for their members.

TPR also encouraged trustees of schemes invested in pooled funds to review fund manager policies on ESG-related issues, after its review found that, even where trustees referred to reviewing and monitoring managers, there was often little detail provided on what this entailed.

In particular, the regulator noted that ISs were often lacking in clear, scheme-specific examples of what ESG-related voting and engagement activities had been undertaken during the reporting year.

TPR therefore urged trustees to do more in this area to demonstrate that they are effectively managing financially material risks for their scheme, emphasising that, even where schemes are invested in pooled funds, there are still options for trustees to show active engagement and advocate for their scheme’s policies.

These include requesting that asset managers vote on issues in a way consistent with the trustees’ own stewardship priorities or joining collaborative investor initiatives.

Commenting on the report, TPR climate and sustainability lead, Mark Hill, said: “A focus on compliance only is a missed opportunity.

"Trustees should aim to fully demonstrate their engagement with material ESG considerations whether climate impact, nature loss or social factors and invite challenge in the interest of protecting outcomes for savers.

“Trustees must provide appropriate detail in their reporting and show they are influencing and taking ownership of ESG considerations, even where responsibilities are delegated, or where the scheme is invested in pooled funds.

“As ESG disclosure reporting requirements are likely to continue to expand, trustees may wish to voluntarily become early adopters of reporting requirements relating to, for example, nature, biodiversity and social factors.”

The report was based on a quantitative review of around 3,500 scheme returns to check how many trustees in scope had provided a weblink to their SIP and IS disclosures.

The regulator also used machine-reading techniques, supplemented by TPR staff, to review SIPs and IS from around 375 schemes, as well as carrying out an in-depth review of SIPs and IS provided by around 50 schemes.

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