ESG investing — a guide for pension scheme trustees

What is ESG investing?

Environmental, social and governance issues are increasingly important non-financial factors taken into account by investment managers when putting together or reviewing portfolios for clients, including the investments held by occupational pension schemes. Case law has long held that a trustee’s duty to pension scheme members is to act in their best financial interests. While this was long thought to preclude serious consideration of ESG investing, research shows the two are not mutually exclusive.  Environmental impact is seen as the major focus of ESG investing but more clients are looking at wider issues, such as the gender and ethnicity policies of investment houses.

Investment consultancy company bfinance has published a recent report on ESG investing, polling 256 senior staff at pension schemes and other asset owners. The findings show that 28% of investors, including 36% of pension funds, now map their portfolios against the United Nations Sustainable Development Goals, up from 3% three years ago. The impact of the Coronavirus pandemic is likely to increase this focus. 

ESG investing is increasingly important and pension scheme trustees and their investment managers need to be aware of the duties now required of them in respect of ESG.

ESG investing – pension scheme trustee duties

Regulations which came in to force in late 2019 introduced new duties for trustees of both defined benefit and defined contribution schemes.

Defined benefit schemes have long been required to produce a Statement of Investment Principles (“SIP”) and for the first time, defined contribution schemes must also produce a SIP. Under the regulations, the SIP must contain policies on trustees’ arrangements with asset managers, comment on the effects of investment decisions on other stakeholders and address conflicts of interest and issues of shareholder activism.

Additionally, defined benefit schemes must publish their SIP so it is in the public domain.

Finally, schemes must produce an implementation statement, which will provide details on how ESG factors have been considered when taking investment decisions.

The Pension Schemes Bill, which is currently awaiting Royal Assent, includes the power to introduce regulations which could require trustees to report on their exposure to risks involved with climate change.

All these provisions are intended to require trustees to make meaningful decisions in respect of ESG investment and not be a box ticking exercise or doing the minimum to meet the new requirements.

Case studies

The Universities Superannuation Scheme, one of the largest schemes in the UK, last year announced a phased move away from investing in organisations who earned a proportion of their income from tobacco, arms sales or mining for fossil fuels.

Industry groups have published advice to pension scheme trustees on dealing with climate change risks and increasingly investment managers are focussing on sustainability and socially responsible asset classes.

Finally, I mentioned at the start trustees’ duties to act in the best financial interests of members. ESG assets have typically outperformed the market as a whole in recent years and typically have suffered less as a result of the downturn brought on by the pandemic. Achieving the best results for members and investing responsibly can co-exist, which is good news for everyone.