Pension scheme trustees must remain focused on sustainable investment, the Investment Consultants Sustainability Working Group (ICSWG) has said, emphasising that regulatory burdens should not distract from impactful investment decisions.

The workstream in the ICSWG, which launched last year, has published a paper that explored how trustees can focus more on impactful investment decisions and less on regulations and report writing. 

The paper outlined some of the areas that the group will be working on, including the simplification of UK pension scheme sustainability reporting, action on sustainable investing, and investment into illiquid sustainable assets.

For the simplification of UK pension scheme sustainability reporting, the group said it would work with regulators to simplify, reduce and harmonise reporting requirements and regulatory burdens.

The group said its vision is a consolidated regulatory reporting framework, in which each scheme publishes a single sustainability policy, annually for large schemes and triennial for smaller schemes, as well as regular reports on the implementation of that policy.

The report said this would replace all current mandatory and voluntary sustainability reporting requirements, including implementation statements, Stewardship Code reports, Taskforce on Climate-related Financial Disclosures reporting, etc.

The group said it believes this would reduce the volume of reporting required each year and focus regular reporting on high-quality evidence of implementation, particularly if there is guidance to limit the quantity of detail.

In addition to this, ICSWG said it would use direct dialogue with policymakers and regulators to remove barriers to sustainable investing for UK pension trustees.

More broadly, it will seek a regulatory framework and policy guidance that facilitates such action.

Redington head of stewardship and sustainable investment strategy and workstream member, Paul Lee, stated: "It's clear that participants in the investment chain should play a fuller role in policy and regulation, as these frame the well-functioning capital markets on which our clients' financial well-being depends."

It also noted that it would focus on three strategic topics: double materiality (i.e. consideration of investments’ impacts and risks); trustee knowledge and understanding; and assurance of sustainability reporting.

At the same time, the group will look to get clarification of trustees’ fiduciary duties following the publication of the Financial Markets Law Committee’s report, contribute to the Financial Reporting Council’s review of the UK Stewardship Code, and encourage a focus on trustee action in any review of Department for Work and Pension’s stewardship guidance.

The report also set out that the group's focus on investment into illiquid sustainable assets, as it said there are several barriers to greater investment in illiquid sustainable assets for defined contribution (DC) and defined benefit (DB) schemes.

ICSWG suggested that for DC schemes greater clarity from regulators could encourage trustees to phase sustainable options into default funds.

Meanwhile, for DB schemes it stated the primary barrier is the tendency of trustees to focus on insurance-based endgames because illiquid assets are not generally accepted by insurers. 

Given this, the group said it would explore ways to enable and incentivise insurers to accept illiquid assets as well as find ways to incentivise schemes to consider a purposeful run-on objective as an alternative to insurance-based objectives.

Additionally, it said that if the UK government introduces mandatory transition plans for pension schemes, the group believes that trustees should be required to consider investing in climate solutions.

Hymans Robertson head of DC investment and workstream member, Alison Leslie, said that in the interests of transparency and best practice, ICSWG is “delighted” to share its vision of what needs to be done as well as potential thoughts and routes to get there.

“Our positioning paper will guide our work across these three areas in the coming year and give us a clear route and direction,” she added.

Cardano UK head of sustainability and workstream member, Keith Guthrie, said that the workstream is focused on simplifying reporting requirements and reducing regulatory burdens thus facilitating sustainable investment decisions, and this working paper sets out how the group can “help make that a reality”.

“The workstream was set up to work with regulators and policymakers to help free trustees from tick box exercises and enable them to focus more on sustainable investment, in order to improve outcomes for savers,” commented LCP partner and head of responsible investment, and workstream chair, Claire Jones.

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