Environmental, social and governance (ESG) risk factors are becoming an increasingly important consideration in pension schemes’ investment decisions.

There are increasing risks faced by pension schemes who do not adequately take these issues into account, particularly those who fail to comply with growing levels of regulation in this area.

While there are plenty of approaches available to defined contribution (DC) schemes, the reality is that this is a complex undertaking, compounded by the fact that there is still a lack of consensus regarding how to define and implement ESG considerations.

There are a number of key factors that must be considered when designing an ESG strategy, including the level of financial risk mitigation offered by the approach, as well as the cost and governance requirements of implementing it.

Developing an appropriate strategy is particularly challenging for trustees who still have low levels of knowledge and understanding of ESG issues.

Trustees may therefore need more support to identify the practical steps they can take in order to comply with regulation and protect members appropriately from the long-term risks these considerations represent.

PPI is currently undertaking a research series on ESG issues that will identify where there may be gaps in method and approach, as well as possible avenues for greater engagement and the support that schemes may need to achieve this.

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