- Majority (71%) of schemes yet to consider the considerable impact ESG factors have on their sponsors’ covenant
- Only a small minority (12%) of trustees have put a finalised strategy in place to address and report on climate-change risk, with almost half (47%) still at starting line
- Although, nearly two thirds (64%) have agreed and are implementing ESG strategies related to investment risk and return
UK pension scheme trustees have significant work to do to more fully implement environmental, social and governance (ESG) strategies and risk-management, and add further value to member outcomes, according to new research from EY into UK defined benefit (DB) scheme trustees’ approach to ESG integration*.
Trustees are under increasing scrutiny and pressure from Government, regulators and members to integrate ESG considerations across scheme investment portfolios, operations and long-term journey planning. While the research shows that almost all (94%) of UK trustees surveyed agree or strongly agree that addressing ESG factors is consistent with their fiduciary duty to act in members’ best interests, only one out of ten (12%) are factoring climate-change risks into their investment management processes**, and fewer than two in ten (19%) are accounting for ESG risk in the assessment of their sponsor’s covenant.
To date, trustees have predominantly focused their ESG deliberations on investment risk and return. Nearly two-thirds (64%) have an agreed ESG strategy that they are currently implementing into their asset management processes, with a further 35% at the strategy advancement stage.
The majority (76%) of trustees have implemented the changes required to update their scheme’s Statement of Investment Principles (SIP) in relation to ESG factors, with the remainder having agreed their strategy for doing so. Over half (59%) have already implemented changes in asset management mandates and service level agreements.
However, only a small proportion (12%) have started to implement their policies for addressing and reporting on climate-change risk, despite a deadline of October 2021 for larger schemes (£5bn+) to comply with the Task Force on Climate-related Financial Disclosure (TCFD) requirements. Under half of schemes (41%) say they have complied with the UK Stewardship Code, although another 41% of trustees report being in discussion on their strategy in this regard.
Just under a quarter of trustees (24%) have agreed or have already implemented their strategy for reporting ESG progress to members and other stakeholders. Broadly, trustees are yet to agree clear measures for monitoring and reporting on ESG; no schemes reported having fully implemented their strategy on monitoring and reporting, while just 24% have agreed the strategic parameters of this process.
Marc Hommel, Senior Pensions Advisor, EY-Parthenon, comments: “Progress in all areas of ESG integration, risk management and reporting for pension schemes is likely to evolve rapidly through 2021. Major steps forward this year are being driven by a combination of factors - a new Pensions Act requiring focus and reporting on climate-change risk; increasing acceptance by trustees that addressing ESG factors is consistent with their fiduciary duty and a source of superior risk-adjusted returns; and pressure from the Pensions Regulator to reflect ESG factors in investment principles and reporting.”
Karina Brookes, UK Pensions Covenant Advisory Leader at EY-Parthenon, adds: “One area that needs urgent focus from trustees is the consideration of ESG risks in the assessment of the sponsor’s covenant to the pension scheme. Many sponsors are facing material disruption and risk to their sustainability as a result of the structural shifts currently reshaping the global economy – whether through changing environmental priorities and regulation, accelerating digital disruption, evolving consumer demographics and preferences, or changing working patterns. In many sectors the timeframe of these changes has been accelerated by the pandemic and trustees need to ensure their decision-making is underpinned on an understanding of these factors. It’s critical that trustees know they’ve adequately evaluated the environmental, social and governance factors that impact on covenant longevity.”
Notes to Editors
- *EY conducted a pulse survey in December 2020 in conjunction with a webinar attended by 85 trustees of UK defined benefit pension schemes, set up to discuss how focusing on ESG factors can and should be used to enhance pension scheme outcomes.
- ** Note that only pension schemes with assets over £5bn are required by regulation to report by October 2021 on climate change; schemes over £1bn will be required from October 2022 although it is an encouraged practice across all pension schemes.