Pension investment decisions face further disclosures

From next year, trustees could face additional disclosure requirements on how environmental, social and governance (ESG) issues are taken into account when making investment decisions.

 

On 18 June, the Department for Work & Pensions (DWP) published its long-anticipated consultation document Consultation on clarifying and strengthening trustees’ investment duties. This consultation addresses the duties of trustee boards with regard to the extent to which they should consider ESG issues when setting investment policy. It also considers ways in which this policy should most effectively be evidenced.

 

Pension schemes are increasingly focusing on ESG Issues as a way of managing long-term financial risks, rather than simply as ethical investments. The proposals would strengthen the focus on putting investments to work to combat the social and environmental issues and addressing governance risks.

 

The proposed regulations would amend the required content of the Statement of Investment Principles (SIP), asking trustees to set out how they take into account of financially material consideration including those in relation to ESG including climate change. Under the proposals, schemes with defined contribution benefits will be required to update their default strategy to set out how they take account of financially material consideration including those in relation to ESG including climate change. They will also be required to publish their SIP on a website, so that it can be read by both members and interested members of the public.

 

Under the proposals trustees will also be required to produce and publish online an implementation report setting out how they acted on the principles set out in the SIP.

 

While the consultation’s proposals were widely welcomed, there were some concerns over bringing the benefits in line with costs, value and focus. For example, the proposals would require the trustees to prepare and publish a separate statement on members’ views on the extent to which these are taken into account. It is arguable that paying attention to members’ ethical views could distract from ESG issues and the focus on financial benefit and control.

 

If you would like to discuss how this consultation, and the future changes, could affect your investment decisions, please contact Eva Havelka or Lila Clarke on +44 (0)20 7334 9191 or via email.

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