Environmental, Social and Governance (ESG) considerations have become central to pension scheme investment strategies. As major institutional investors, pension schemes are at the forefront of an evolving regulatory and stakeholder landscape that demands both compliance and meaningful action.

The ESG imperative for pension schemes

ESG is no longer a ‘nice to have’ for schemes’ investment considerations. As the Pensions Regulator (TPR) has recently stated, awareness of and managing systemic risks is now a core part of effective trusteeship. It’s a statutory requirement for most, with schemes under obligations from a raft of legislative requirements and guidance. It’s also a business imperative. ESG factors carry both risk and opportunities when investing scheme assets, and can directly impact employer covenant. Trustees should treat ESG as a central part of investment decision-making. Further it remains a hot topic with household-name companies and schemes facing public scrutiny, corporate action and even litigation, including from member action groups, over how seriously they take ESG concerns. It highlights growing recognition of the wider economic and social role pension funds play.

The regulatory landscape

Currently, pension scheme trustees are required to understand and act on financially material factors including ESG considerations. Trustees of the largest schemes are also subject to governance and reporting requirements set out in regulations under the Pension Schemes Act 2021 and in line with Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations: schemes in scope must take steps to identify, assess and manage climate-related risks and opportunities and report publicly on what they have done. Since 2022, this has included disclosures related to their investment portfolio’s alignment with the Paris Agreement goal.

In addition, relevant schemes’ statement of investment principles (SIP) must cover the trustees’ policies on financially material ESG considerations (and the extent to which non-financial matters (such as the views of members and beneficiaries) are considered in investment decisions). Trustees must also prepare a publicly available ‘implementation statement’ covering their stewardship (engagement and voting on matters affecting long-term value.)

Read more: TLT