Environmental, Social and Governance considerations (ESG)

ESG bought about a big shift in the culture of the UK Pensions sector, but in doing so gave the members increased transparency and protection.

The pandemic has refocused our mindset again and now more than ever there is an increased focus on Environmental, Social and Governance factors not just from the Regulator, but on savers wanting to know how their money is invested and how the climate related financial risks to their savings are being managed.

The Trustees were already required to state the extent to which they consider ESG factors in their Statement of Investment Principles (SIP).  But on 1st October 2019 trust-based DC and DB pension schemes with over 100 members, had to update their default investment strategy and publish their SIP. This included the need to include the risk of their investments to ESG factors, and their policy on taking account of financially material considerations.

From 1st October 2020 we had the increased requirements of schemes having to include an implementation statement in their annual report, detailing how the SIP has been followed and how ESG factors were considered as part of the investment decision process. By October 2021 this needs to be published online too.

The Pension Schemes Bill demonstrates the governments intention to further regulate, with powers that could require schemes to report on their exposure to climate change risk. Guy Opperman states the new Bill “will make our pensions safer, better and greener”

He also states that “we were the first government of the G7 to legislate to put net zero on the statute book by 2050. There’s no question on my mind, having spoken in Europe with European colleagues, that we lead the way on ESG”.

It is abundantly clear that the UK government is planning more action on climate change and environmental issues, and therefore for Trustees the key message is to ensure compliance with the regulations in place, but perhaps almost looking further to embrace the shift in mindset and embrace the new normal for investment.


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