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Evolving ESG regulation and its impact on DC
11 September 2020

Evolving ESG regulation and its impact on DC

You’ve updated your statement of investment principles; you’re preparing to write an implementation statement… surely it’s time for a lull in regulatory changes for Defined Contribution (DC) investments? Actually, no – there’s a range of developments on the horizon that DC trustees need to consider and plan for. Here’s an overview of key points to watch.

Climate change disclosures

Currently, pension schemes may voluntarily make disclosures in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), but this is expected to become mandatory for large asset owners by 2022. The Pension Schemes Bill includes powers to set a range of disclosure and governance requirements relating to a scheme’s exposure to key risks – but the government’s view is that schemes should already be actively working towards the TCFD recommendations and reporting on their progress. Industry guidance will provide a starting point for schemes to project plan towards compliance.

IORP 2 and a new Code of Practice

The (delayed) Code setting out The Pensions Regulator’s (TPR’s) expectations on governance and internal controls will provide further guidance on Environmental, Social and Governance (ESG) issues, including:

  • how scheme governance should include consideration of ESG factors in investment decisions, and
  • in relation to a scheme’s own risk assessment, how trustees assess new or emerging risks, social risks and stranded/ depreciating asset risks.
EU Sustainability regulation (aka the Disclosure regulation)

A new angle under this regulation is the requirement to publish information on how schemes consider the principal adverse impacts of their investment decisions on sustainability

factors (or reasons why they do not). ‘Sustainability factors’ has a different and wider definition than ESG: it will require disclosure of whether schemes consider the impact of investment decisions on, for example, respect for human rights.

 

Illiquid investments

The government also has other plans for DC, including requiring larger schemes to publish their policy on illiquid investments (assets that are traded off, exchange or are less readily tradeable) and report on compliance annually. Scheme size thresholds could be as low as either GBP250 million in DC assets or 5,000 members.

What to expect next:

> Publication of non-statutory industry guidance on TCFD disclosures (due Autumn 2020)

> Regulations to mandate TCFD disclosures – a phased approach is expected, starting with larger schemes, with transitional easements where data is not available. A consultation is expected shortly

> A TPR consultation on a new Code of Practice implementing aspects of IORP2 and including further ESG guidance

> Draft regulatory technical standards under the Sustainability Regulation have been published; guidance for pension schemes is awaited

> Draft regulations are expected on DC investment in illiquid assets/infrastructure investing

Notes/Sources

This article was featured in Pensions Aspects magazine September edition

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Last update: 19 January 2021

Neil Bowden
Neil Bowden
Allen & Overy LLP
Partner

Assistant Pensions Investment Consultant - Berkshire

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