ESG governance for smaller pension schemes: learning from the big players

As the government appears to ease its commitment to net-zero targets, environmental, social and governance (ESG) considerations remain at the forefront of pension scheme planning, strategy, and reporting requirements.

Given the governance budget restrictions that smaller schemes often face – what are the key insights and are there any ‘ESG hacks’ smaller pension schemes can take from their larger counterparts?

ESG has evolved from peripheral concerns to central regulatory requirements. Even though the initial excitement surrounding these issues has waned due to the increased regulatory burden, it is essential for trustees of smaller schemes to recognise the ongoing importance of developing and reflecting ESG in pension schemes’ strategies. Rather than viewing it as a regulatory hurdle, or another box to tick, it is recommended that smaller schemes embrace ESG as a central component of responsible pension scheme management.

One of the key challenges larger schemes have faced is the Taskforce on Climate-Related Financial Disclosures (TCFD) reporting, which is complex and time-consuming. The annual TCFD reporting requirement demands considerable effort and expense, not least of all because gathering accurate and reliable climate-related data can be a significant challenge. In addition, some aspects, such as scenario analysis, are expensive and time-consuming, whilst arguably adding little value given the data challenges. 

Therefore, smaller schemes who do not have the regulatory requirement to produce TCFD reports should avoid these areas and focus their governance budget on aspects that can be more impactful. That being said, there are plenty of considerations and actions that are required in producing a TCFD report which can be impactful and useful in improving the approach to ESG, which are covered in the points below. 

One thing trustees of smaller schemes can do now is review their advisers in terms of the quality of their advice and the approach being taken on ESG and take action to improve things where needed. This could also include asking for a representative from one of their advisers’ ESG teams to attend a meeting for training purposes, to review the beliefs and how well ESG is being integrated into the existing strategy. 

Under current regulation, occupational schemes are required to include a responsible investment policy within their Statement of Investment Principles. Due to the public nature of these policies and the requirement to consult with the Sponsor, they often end up being significantly diluted versions of a board’s actual ESG views. It may therefore be appropriate to draft a separate informal policy or belief statement that the board feels better represents their views. 

Lots of schemes, regardless of size, have investment sub-committees However, ESG can often fall between the gap between sub-committees and trustee boards. Trustees should discuss where responsibility for considering ESG lies, that this is reflected in any terms of reference as appropriate and that the frequency of reviewing any ESG reporting and taking necessary action is agreed.

Whilst ESG has certainly risen up trustees’ agendas, time to discuss these important issues can still be squeezed due to plenty of other pressures. When looking at the business plan for next year, trustees should build in time to their meeting agendas to discuss and debate ESG and ensure that their approach evolves with their views and beliefs, not just hitting regulatory milestones. Also, ensuring ESG risks are explicitly included in schemes’ risk registers helps trustees to identify the risks. Regularly monitor and update it to address evolving ESG challenges, such as regulatory changes, government policy, shifts toward low-carbon investments and the increasing frequency of extreme weather events.

Smaller schemes can also benefit from the opinions and concerns of scheme sponsors, engaged beneficiaries and other stakeholders. Their perspectives can provide valuable insights into ESG priorities and help trustees to make informed decisions.

A core aspect of TCFD reports is the metrics and targets section, reporting on aspects such as carbon emissions and carbon intensity of the companies that trustees invest in. Whilst this is an area that is rapidly improving, many organisations struggle to provide comprehensive carbon data. Data quality and consistency can also be problematic, as different sources may use varying methodologies and standards.

Smaller schemes wishing to measure and report on ESG metrics, should focus on aspects that align with their scheme’s goals – it doesn’t have to be complex. For example, rather than considering carbon intensity or carbon footprint, trustees could engage with asset managers to increase the proportion of the portfolio where the investee company provides climate reporting or has set science-based targets. In addition, consider tangible measures, such as engagement reporting with companies on ESG issues, to demonstrate progress and impact.

Smaller pension schemes can learn valuable lessons from their larger counterparts about how to impactfully integrate ESG considerations as well as avoiding expensive pitfalls. By adopting some of these suggestions, they can navigate the evolving regulatory landscape effectively, demonstrate their commitment to responsible investing and ultimately provide better outcomes for their members while contributing to a sustainable future.

If you have any questions or want to find out more on this topic, please get in touch with the author: Sophia Harrison.

Please note this piece originally featured in Professional Pensions on 6th October 2023.

Sophia Harrison


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