With ESG issues remaining a hot topic for pension scheme trustees, we highlight three points arising from the Regulator’s new Climate Change Strategy, which was published in April, for trustees to be aware of.

It’s not just about the biggest schemes:

The latest requirements, in the Pension Schemes Act 2021, are initially aimed at schemes with over £5bn in assets and extending next year to schemes with over £1bn in assets.  However, TPR plans to issue guidance which specifically looks at how to incorporate ESG into integrated risk management, with the aim of engaging smaller schemes in this area.  The vast majority of schemes, big and small, are already required to report on how they incorporate financially material factors (including ESG) into their investment strategy and on their stewardship activities.  TPR has plans to publish links to schemes’ statements of investment principles to encourage compliance, to include a stewardship module in its forthcoming code of practice, and to take steps to encourage best practice when meeting reporting requirements.  We should expect to see increasing and continuing engagement from TPR in this space, in relation to all sizes of scheme. 

Net zero: 

The government has chosen not to impose targets onto pension schemes, instead preferring to leave investment decisions to trustees to make in a way that is consistent with their fiduciary duties.  Some bigger schemes, described by TPR as “trailblazing” have chosen to adopt net zero targets for their investments, and the strategy paper makes clear that TPR would like “to see all schemes learn what they can from these examples”.  TPR is also taking action in this area, the paper telling us that TPR intends to adopt a “net zero by 2030” target for its own operations. In our view, schemes can expect to continue to be nudged towards voluntary adoption of net zero targets.

A broader approach to the ‘E’:

The strategy document notes that climate change, while the focus of current legislative change, is not the sole sustainability-related financial risk that could affect pension schemes.  Therefore it could be that future iterations of the strategy look at other risks, for example biodiversity loss.  This is not surprising;  climate change is an immediate risk, but there are many other aspects to the ‘E’ that may also impact on sustainability of investee companies.  We also note that the Government recently launched a Call for Evidence on the social element of ESG investing, a foreshadowing, we suspect, of continuing steps along the route of better (and broader) ESG for pension schemes.