There is a misalignment between defined benefit (DB) pension schemes and their corporate sponsors over ESG commitments, according to a report from Cardano.

The consultancy examined views of more than 220 UK chief financial officers (CFOs) and senior executives with responsibility for their companies’ DB pension schemes.

According to the report only 37% of CFOs and senior executives reported that their corporate strategy and schemes’ ESG agendas are aligned. This includes just 15% who feel there is close alignment.

In contrast, 62% of CFOs think their pension schemes have ESG agendas that are significantly different from their corporate strategy. This was particularly true among CFOs of small schemes – with up to £100m in assets under management (AUM) – with 80% falling into this category.

However, almost half (46%) of CFOs with schemes of over £1bn AUM said their corporate ESG strategy and pension scheme ESG agenda are significantly different.

The report shows the largest DB schemes have the strongest ESG alignment with their corporate sponsor, with 21% of CFOs stating that alignment is ‘close’ and 33% reporting it is ‘moderate’. Almost two in five CFOs (39%) responsible for large schemes are working with scheme trustees to align their ESG and corporate strategies.

This is in stark contrast to the outlook among small schemes, where 51% of CFOs reporting that addressing significant differences in ESG strategy is not a corporate priority. One in five (20%) CFOs responsible for mid-sized schemes (£100m-£1bn) feel the same.

While the findings show schemes are divided on the importance of ESG alignment, the report showed a consensus on the importance of accountability for equality, diversity, and inclusion (EDI) issues with 80% of CFOs saying that pension scheme trustee boards should be held to the same level of accountability as corporate boards, with fewer than 5% opposing this view.

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Source: Cardano

Impacts of climate change

The research also showed that CFOs are unclear about the future financial implications of ESG issues on their businesses.

The report said that the average CFO only has a moderately clear view of the future financial implications of the most material ESG issues on their company, including existing climate change commitments. On a 1-5 scale where one represents ‘a strong view’ and five represents ‘no view’, CFOs rated their clarity at 2.56.

Similarly, CFOs are uncertain about their preparations for managing incoming climate-related regulatory requirements. Only CFOs of large pension schemes rated their preparations above moderate (2.24) on a scale of 1-5, while the average CFO of a small scheme is underprepared (3.66).

Michael Bushnell, managing director and head of ESG advisory for UK at Cardano, said: “Despite growing discourse around ESG risks, the fact that corporate agendas and their DB pension schemes’ ESG priorities are at odds with one another risks creating a zero-sum game where business and schemes are pulling in opposite directions.”

He said that the lack of alignment represents a “material risk” for CFOs, with potential for either party to undermine good intentions and progress if external stakeholders find sponsors and trustees are out of step or even contradicting each other.

Bushnell added: “With many CFOs lacking clarity and therefore feeling unprepared to make meaningful progress on their ESG priorities, businesses must find new ways to develop a strategy that meets increasing regulatory requirements while maximising opportunities.”

He stressed that while some businesses are taking steps to move forward, “no one can be comfortable” with a situation where so many businesses are “apparently in the dark” about the financial implications of material ESG factors.

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