Jason Coates
Partner
Article
Published27 January 2025
ESG for pension scheme trustees – navigating the duties and best practice for your scheme
The final quarter of 2024 saw two important global conferences take place on environmental matters. In October 2024, politicians, business leaders and heads of non-governmental organisations gathered with others in Cali, Columbia, for the United Nations Biodiversity Conference (also referred to as COP16). A key aim of this meeting was to mobilise resources and action to support global action on biodiversity. As part of this, a coalition of 27 of the world’s largest pension funds has urged governments that were present at the summit to introduce policies and regulations aimed at halting biodiversity loss.
Following shortly after COP16, November saw the meeting of the 29th session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP29) in Baku, Azerbaijan. This focused on enabling action in response to climate change and, in particular, the importance of finance, and the role of investors and asset managers. Once again, the part that pension funds can play will be in the spotlight, with pensions accounting for a material share of global savings.
Reporting and managing ESG issues has never been more important and, as well as company boards, pensions trustees need to fully understand their legal duties in this area and share good practices. Here, we look at the latest review of trustee compliance with ESG duties and the steps trustees need to take, sharing two new practical guides we've put together to aid compliance.
What does this mean for pensions in the UK?
The Pensions Regulator (TPR) has recently brought together all of its environmental, social and governance (ESG) materials into a single location and published the latest in its reviews of trustee compliance with ESG duties. TPR was unambiguous in its assessment of performance, concluding that many schemes are only demonstrating minimum compliance with legal duties. TPR would like to see "more than minimum compliance in respect of the contents of the SIP [statement of investment principles] and IS [implementation statements]". As part of this, trustees should include "appropriate levels of details in their reporting to demonstrate that they are effectively managing financially material ESG-related risks".
As TPR is expecting more from trustees on climate change risk reporting, the breadth of ESG issues that trustees should factor into their duties is broadening. TPR specifically states that trustees should consider going beyond climate change reporting – for example, social factors and nature/biodiversity are particular areas of focus for industry and regulatory attention this year.
In our experience, many trustees are keen to do more than the minimum required to comply with the law. ESG brings together a range of complicated and interconnected issues that often need to be broken down to enable effective understanding and decision making.
Guidance for trustees on navigating ESG-related issues – how we can help
To help trustees of occupational pension schemes navigate the legal requirements and good practice in this area, we have prepared two practical guides to cover the different types of schemes.
ESG for trustees of defined benefit pension schemes
ESG for trustees of defined contribution pension schemes
Trustees of hybrid schemes may benefit from reading both guides.
The best place to start for many will be a reminder of the core legal duties and practical steps that trustees can take in accordance with those legal duties.
A useful next step might be refresher training for trustees, given the constant developments in this area. Our Pensions team is working with many clients to help them stay on top of evolving ESG issues and regulatory requirements, and is able to draw on a diverse range of experience to deliver bespoke training to trustees. We focus on the key issues for each client and seek to facilitate ESG training sessions that will build both trustee knowledge and understanding, while also providing lots of practical information and time for discussion. This training can focus on the current legal duties and/or extend into the broader realm of social governance, sustainability and biodiversity.
In addition, it might also be timely for the trustees to review and refresh their SIP and implementation statements.
Beyond training and documentation, the clear expectation from TPR is that policy statements are converted into meaningful and practical actions. This may include steps such as:
- selecting, engaging with and monitoring the scheme's fund managers;
- reviewing investment management agreements; and
- engaging with the broader range of ESG risks and opportunities, beyond climate change.
Another important step for trustees of DC schemes is, where applicable, to review the default fund. TPR expects trustees to understand the ESG approach of all of their scheme's available investment funds. The Pensions and Lifetime Savings Association (PLSA) recommends that trustees consider the default fund's asset mix and the indices they are tracking in passive mandates. Trustees may also want to consider how stewardship is managed and reported on by different fund managers.
With the backing of our firmwide ESG network and the Pension team's ESG Working Group, your client service team at Gowling WLG is well-placed to work with you on the next steps of engagement with ESG issues.
To discuss any of the above insight and guidance in more detail, please contact Jason Coates or Murray Keir. You can also sign-up to receive more updates from the wider team on ESG and pensions-related changes and developments.
NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.
