ESG hot topics for UK pension schemes - April 2023

Fines for Unpublished Implementation Statements

This quarter, tPR will launch a regulatory initiative to monitor trustee reporting of important scheme ESG data via Statements of Investment Principles (SIPs) and Implementation Statements (IS).

Over the Summer, tPR will review a “cross-section” of these publications for schemes with over 100 members (unless exempt), with plans to highlight good practice.

Failure to publish the SIP and IS on a publicly available website in line with regulations may result in enforcement action taken by the Pensions Regulator for schemes in scope, including fines up to £50,000 where the trustee is a corporate body.

The Executive Director of Frontline Regulations at tPR, Nicola Parish, said: “All savers deserve to be in well-governed schemes which protect their retirements by appropriately managing and reporting on ESG and climate-related risks and opportunities.” And that "These reporting disclosures represent compliance with the basic requirements in relation to ESG and climate change, so it's disappointing some trustees are failing to meet them."

Review of First-Wave of TCFD Reports

In March 2023, tPR published its review of climate-related disclosures by 71 occupational pension schemes. This aimed to identify and provide feedback on emerging good practice, along with areas for improvement. The overarching observations were that:

• Almost all reports were published on time;
• Almost all are substantial documents (average 34 pages), which showed an encouraging level of trustee engagement with the new requirements; and
• Some reports included helpful non-technical summaries for savers.

However, the review also identified several areas for improvement, which trustees should note for the next round of reporting. These common issues include:

• Insufficient background information on the schemes;
• Disclosures not provided in line with the level outlined in the statutory guidance; and
• Accessibility issues regarding web addresses and PDFs.

While trustees of smaller schemes are not subject to these regulations currently, they may still find tPR’s findings useful in improving their management of climate-related risks and opportunities.

New Taskforce on Social Factors

Following the Department for Work and Pensions’ (DWP) initial proposal in July 2022, in response to the government’s Call for Evidence of the consideration of social risks and opportunities by pension schemes, the Taskforce on Social Factors officially launched on 28 February 2023.

Analysing issues such as labour rights and health and safety, supply chain and modern slavery issues, and inclusion and diversity; the Taskforce will run for one year, and it’s three primary objectives are to:

• Identify reliable data sources;
• Monitor and report on international standards such as those from the International Sustainability Standards Board; and
• Develop how trustees can manage risks caused by modern slavery and supply chain issues.

Hilkka Komulainen (Head of Responsible Investment at Aegon UK and member of the TSF) said that the Taskforce seeks to “address the barriers of measuring and managing social matters, progress on which has to-date lagged over responsible investment topics.” Schroders encourages trustees to ensure they consider social factors as part of their stewardship obligations.

Taskforce on Nature-related Financial Disclosures

The Taskforce on Nature-related Financial Disclosures (TNFD) officially launched in June 2021 and has since issued three iterations of its beta framework for market consultation. It plans to release the first version of the full framework for market adoption in September 2023. TNFD’s mission is to ‘develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks.’

At present, despite the Pensions Regulator stating that it is keeping “very close tabs” on the work of the TNFD, tPR hasn’t stated that reporting will become mandatory for pension schemes in the immediate future. However, the Climate and Sustainability Lead at tPR has pointed to TNFD as an example area of focus around reporting. Therefore, trustees may need to consider nature-related financial disclosures in their investment reporting in the future.

As a manager which has set validated Science Based Targets in support of our Net Zero commitment and is fully ESG integrated across our in scope managed assets, Schroders has recently made several pledges to help mitigate the risk to our natural world where it manages assets directly on behalf of our clients. For full information on our commitments in this area, please read our Schroders Group Nature and Biodiversity Position Statement. Also, view our CEO, Peter Harrison, sharing his views on our Plan for Nature here.

We will continue to support trustees in meeting evolving regulatory requirements in this area and encourage trustees to consider biodiversity as part of its stewardship obligations.