The Pensions Regulator (TPR) has warned that ignoring environmental, social and governance (ESG) factors is no longer an option for pension trustees, emphasising that as well as significant risks, there is the potential for significant opportunities.

In a blog post, TPR director of regulatory policy, analysis and advice, Lou Davey, noted that focus on ESG has grown following developments in government policy, increased regulations, industry initiatives and greater awareness of the potentially profound implications if action is not taken.

She also argued that whilst there are challenges around certain aspects of ESG, such as data quality concerns, pension scheme trustees should not allow these challenges to prevent them from meeting their ESG duties.

"There have been concerns around availability and quality of data, effective modelling of outcomes and impacts, the implementation risks of greenwashing and the potential for green hushing – where firms keep quiet about their emissions reduction targets to avoid scrutiny," she stated.

"These are legitimate concerns, but they shouldn’t be a barrier to trustees meeting their legal duties or an excuse to put things in the too-difficult-to-do box.

"Trustees should be mindful that these climate, environmental, social and governance concerns, and more, have been acknowledged by policymakers, regulators, and wider industry.

"Indeed, the pace and scale of change in relation to data improvements, policy development, guidance and regulations to help drive change and reduce some of these industry challenges has been phenomenal in recent years."

Davey also reminded schemes of TPR's upcoming ESG regulatory initiative, which will see the regulator review pension schemes' statement of investment principles (SIPs) and implementation statements (ISs) to ensure they are meeting the relevant requirements.

The review of SIPs and ISs is expected to begin in autumn, Davey confirmed, as the ISs prepared and published for scheme years ending on or after 1 October 2022 should reflect the guidance published by Department for Work and Pensions (DWP) in June 2022.

Davey also confirmed that TPR will look to finalise the details of the second phase of the review and the schemes the regulator intends to include "over the coming months".

“When we carry out our review, we expect to focus on the extent to which the DWP guidance has been adopted by the trustees," Davey explained.

"We will also look to identify and publish examples of good practice to help other schemes to improve their future disclosures.

“Where we believe schemes have not made a reasonable effort to define their policies in the SIP and report on how those policies have been implemented in the IS, we can take enforcement action."

Commenting more broadly, Davey emphasised that whilst climate change can present significant risks, there is also the potential for significant opportunities, "as the global economy transitions and local economy policymakers align behind a ‘carrot’ approach to incentivise decarbonisation, emissions reductions and transition".

“Trustees need to improve their understanding of climate, ESG and wider sustainability issues." she continued.

“Trustees also need to improve the quality of their policies and disclosure, move away from boilerplate wording and ensure action follows intent.

“For too long, too few trustees focused on climate, ESG and wider sustainability issues in any significant detail, however, trustees can no longer ignore the elephant in the room.”

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