New disclosure rules relating to UK pension funds’ consideration of environmental, social and governance (ESG) factors and engagement with investee companies should be seen as a first step in an “ESG journey for trustees”, according to the industry’s main trade group.
Under the changes, which come into effect tomorrow, trustees must outline their approach to engagement with and voting of their shares in investee companies, and how they take account of financially material factors, including ESG and climate change considerations, in investment decision making.
The changes reflect regulatory updates from the Department for Work and Pensions (DWP) in 2018. Further changes to the investment regulations for occupational pension schemes were made this year in order to implement the EU’s revised Shareholder Rights Directive II.
Caroline Escott, policy lead for investment and stewardship at the Pensions and Lifetime Savings Association (PLSA), said: “The PLSA supported the DWP’s work to better help trustees consider ESG and stewardship approaches, but we must remember that this is the start of the regulatory journey and not its final destination.”
Trustees had to continue working with advisers and managers both to implement ESG and stewardship approaches across their portfolio, and to consider the best way to talk about these issues with scheme members, she said.
“This will be important if they are to meet the next set of 2020 regulatory deadlines, as well as those coming down the track in 2021,” said Escott.
There had been “an explosion” in the number of ESG products in the market over the last few years, she said, but schemes had to continue to be vigilant.
“Trustees should work with their advisers to do the proper due diligence to differentiate between those asset managers who are walking the walk on ESG and stewardship and those who are just greenwashing,” she said.
Separately, BMO Global Asset Management said asset managers had to show they were capable of supporting pension funds in meeting the new requirements.
Christy Jesudasan, fiduciary management sales director at the firm, said: “The DWP regulations are a step in the right direction, moving the market from box ticking to having a plan of action for trustees to truly embed ESG risks into trustee governance and strategic plans for schemes.
“Asset managers now need to prove their abilities and expertise across all three phases – advice, implementation and reporting,” he said.
In the run up to the deadline, he said, trustees had been increasingly focusing on the role of ESG in investment portfolios, with the new disclosure requirements forcing them to consider ESG factors across all stages of the investment process.
This made it more important than ever for asset managers to have an open dialogue with pension trustees that factored in long-term funding objectives and made sure all parties were aligned on ESG goals and risks, he said.
“While tailored solutions will be key, with no consistent framework in place we can expect a wide variation in the format and quality of reporting from asset managers,” Jesudasan said.