Pension funds should focus on investment issues that materially affect long-term returns, and not just look at “the flavour of the month” within the industry, such as ESG's current popularity, the Financial Reporting Council (FRC) has warned.

Speaking at the PLSA's Investment Conference, the FRC's senior investor engagement manager, Jennifer Sisson, highlighted that its UK Stewardship Code currently does not make any explicit reference to ESG.

While not disputing the importance of considering ESG within a pensions scheme's investment portfolio, Sisson pointed out that the code instead focuses on capital allocation, investment managers' engagement with the companies in which they invest, remuneration issues and governance.

“At the FRC, as we do with company reporting, we think these things should be through a materiality lens,” Sisson explained. “So what are the issues you need to be thinking about for your long-term returns that are material and not just the flavour of the month.”

The FRC's UK Stewardship Code aims to enhance the quality of engagement between investors and companies to help improve long-term risk-adjusted returns to shareholders. Originally published in 2010, it was last updated in September 2012 and is due to be revised this year.

Sisson highlighted that the FRC does not hear from pension funds as often as it does from asset-owners generally, and so the FRC is actively aiming to increase the number of pension fund signatories to the code. It currently has 300 signatories overall.

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