TPR urges trustees to 'take stock' of wider ESG factors

The Pensions Regulator (TPR) has urged pension trustees to "take stock" and think about further developing their approach to managing wider environmental social and governance (ESG) risks and opportunities.

In a blog post, TPR climate and sustainability lead, Mark Hill, noted that ESG disclosure reporting requirements have expanded, suggesting that this is a trend that looks set to continue as practices around wider sustainability factors, such as nature and social, develop.

Whilst Hill acknowledged that climate reporting will already be business as usual for those in scope, he stressed that scheme trustees should continue to improve their understanding of wider material ESG considerations, including their inter-relationship with climate change and, if appropriate, revise their scheme policies.

“We have heard some say that reporting may get in the way of decision making and action. But the disclosures required should be the output of the strategic decisions that trustees are making,” he continued.

“Pensions operate in a complex world and trustees are increasingly being asked to grapple with new risks and grasp new opportunities. But the role of a trustee fundamentally remains to act in members’ best interests.

“Our job is to use that disclosure to spot the market wide risks and opportunities, and constructively check and challenge decision-making so that savers’ interests are really being met.

“The goal is not disclosure for disclosure’s sake but to encourage genuine change in how schemes operate.”

Hill acknowledged that data remains a challenge, suggesting that the availability and quality of data should help trustees, advisers and policymakers make more informed decisions.

However, he emphasised that "its absence should not stop action", suggesting that a more qualitative narrative approach, building in expert judgement, should allow trustees to act.

In particular, Hill said that trustees should consider becoming early adopters by including nature and social factors in their reporting or policies, pointing out that a number of schemes have already committed to early adoption of Taskforce for Nature-related Financial Disclosures (TNFD) reporting.

Hill also stressed the importance of knowledge sharing, stating that collaborative work, such as that happening on scenario analysis, is “essential”.

In addition to this, he encouraged pension scheme trustees to learn from the experience of Task Force on Climate-related Financial Disclosures (TCFD) reporting, particularly steps that can be implemented relatively easily and have ‘immediate’ impact, such as setting specific objectives for investment consultants relating to nature.

Hill also suggested that trustees focus on initial actions that drive outcomes, before looking to expand those actions as experience develops, for example, breaking down nature-related factors into individual themes, such as, eliminating commodity drive deforestation from portfolios.

“ESG and related reporting is a significant challenge for trustees, but failure to account for climate-related risks and opportunities and, where material, nature and social factors, puts savers at risk,” Hill stated.

“It’s time schemes integrated ESG reporting into core governance operations to ensure they are fit for the future.”

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