So far, the government’s approach has been to strengthen ESG disclosure requirements affecting pension scheme investments, as opposed to mandating specific targets. Such measures include: requiring ESG policies to be listed within Statements of Investment Principles (SIPs); including implementation statements within annual reports; and publishing these documents online.
Moreover, the Pension Schemes Bill, expected to become law by the time you are reading this, includes provisions intended to strengthen the obligations of occupational pension schemes in relation to climate change risk. Under these provisions, trustees may be required to ensure there is effective governance of the scheme with respect to the effects of climate change. Indeed, 2020 saw several high-profile climate pledges from governments, corporates and pension schemes alike. We expect that the focus in 2021 will need to be on turning these pledges into tangible plans of actions.
However, although the focus of the Pension Schemes Bill is on climate change, it is important to remember that this is just one element of ESG. The COVID-19 pandemic and the Black Lives Matter movement have brought increased prominence to the ‘S’ limb within ESG, too. Despite these areas not currently being afforded as much legislative distinction, trustees may want to start focusing on how they can prioritise these other areas. Aside from the clear moral benefits of doing so, it is worth remembering that factors such as worker wellbeing and relations, diversity and inclusion, supply chain issues and corporate purpose and values, do also have the potential to be financially material.
With responsible investing gaining pace, trustees should also be aware of the risk of ‘greenwashing’: unsubstantiated claims that present an environmentally responsible image. Investors need to feel confident that what they are investing in is, in fact, as sustainable as it claims to be and not simply green-wash. We are expecting an Financial Conduct Authority consultation in the first half of 2021 on their proposed principles to help firms be ‘fair, clear and not misleading’, when promoting products from an ESG perspective, which should help to combat this risk.
It is clear that as 2021 progresses, so too will the significance of responsible investing.
This article was featured in Pensions Aspects magazine March 2021 edition.
Last update: 4 March 2021