Pension schemes still playing 'catch-up' on ESG despite increased awareness

Just 10 per cent of pension schemes have a standalone policy on environmental, social and governance (ESG) issues, research from Mercer has revealed, prompting concerns that pension schemes are playing 'catch-up' on improving ESG outcomes.

The analysis, which utilised data from Mercer’s Responsible Investment Total Evaluation (Rite) analysis of more than 650 UK occupational pension schemes, also revealed that only 6 per cent of schemes have a standalone policy related specifically to climate change.

And whilst stewardship was carried out for many schemes by investment managers, the majority of schemes assessed stated that they do not carry out regular reviews of asset managers’ stewardship records.

In addition to this, only 13 per cent of trustees analysed had conducted analysis of carbon intensity and climate change scenarios, whilst just over a third (37 per cent) were working to align with or beyond sponsor’s ESG policies.

However, the research suggested that pension schemes are taking the issue seriously, with 98 per cent of trustees agreeing that ESG issues can have a material impact on financial returns.

Furthermore, whilst Mercer acknowledged that ESG integration can present a “monumental challenge” for UK pension schemes, nearly two thirds (64 per cent) of schemes analysed had a process to integrate ESG into their-decision making in place.

A further 63 per cent of trustees also stated that they have a proficient understanding of ESG, despite fewer than half (46 per cent) of trustees subject to the Rite assessment undertaking an ESG beliefs survey or workshop in the past three years.

However, Mercer argued that many defined contribution (DC) schemes are failing to include "meaningful" ESG allocations in their default investment strategy, with just 38 per cent of those analysed including an ESG in their default, and less than half making these funds available to members who self-select.

According to the analysis, this could leave "tens of billions of pounds" of pension savings without explicit access to ESG funds, if it is representative of the whole market.

Commenting on the findings, Mercer partner and director of consulting, Brian Henderson, stated: “Our analysis shows that some pension schemes are racing ahead on their ESG journey, while others are left not knowing where to start.

“Schemes don’t need all the answers to start their ESG journey, but they need to assess how well integrated their existing plan is on ESG issues.

"From there, they should establish a plan in line with their defined ESG objectives, with actions on how to improve their position, and importantly, determine how they will show their stakeholders and members how they are tracking that progress.”

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