Defined benefit (DB) pension scheme trustees must take a holistic and proactive approach to environmental, social and governance (ESG) risks as endgame strategies evolve, a guide from Isio has stated.

In its Endgame Sustainability Guide, the firm noted that discussions around endgame targets were shifting, with trustees now facing greater optionality between insurance, consolidation, and run-on strategies, rather than pursuing a single objective of full funding on a prudent basis.

Isio head of sustainable investment, Cadi Thomas, warned that ESG risks were “not confined to distant horizons”, warning that while some challenges, such as climate change, unfolded gradually, others - including regulatory shifts or sudden market disruptions - could materialise unexpectedly.

“Trustees must act proactively to integrate ESG considerations into their strategies, whether preparing for a near-term insurance transaction or investing over longer time horizons,” she stated.

Thomas suggested that as run-on strategies gained popularity, there may be greater scope for trustees to deliver real-world impact by operating with less stringent liquidity constraints, while tackling long-term risks more directly.

At the same time, she argued that the assumption that ESG risks could simply be transferred to an insurer was outdated.

“Insurers are increasingly implementing ESG-resilient portfolios, meaning schemes on the journey to insurance should align their investment strategies accordingly to protect against potential pricing disparities,” she said.

Echoing this, the guide highlighted that ESG risks, while often long-term in nature, could crystallise rapidly.

It cited the potential for a so-called ‘Minsky moment’ - defined as a sudden collapse in asset prices triggered by excessive or inadvertent risk-taking - for example, following the abrupt introduction of strict carbon taxes, which could prompt sharp repricing in carbon-intensive sectors.

Recent events in the UK water sector were also referenced as an illustration of how environmental and governance weaknesses could quickly translate into financial stress.

Underinvestment in infrastructure, pollution fines, and high debt levels contributed to declining investor confidence, credit downgrades, and widening spreads, ultimately eroding asset values and prompting broader sector repricing.

Consequently, Thomas stressed that trustees should assess ESG risks across both short- and long-term horizons, regardless of their chosen endgame pathway.

On the practical implications, the guide set out distinct considerations for schemes pursuing insurance, run-on or consolidation.

For those targeting insurance, it recommended ensuring low-risk credit allocations were sustainable, considering flexibility within liability-driven investment mandates - including the potential use of green gilts - and assessing insurers’ ESG capabilities to avoid last-minute portfolio adjustments or pricing mismatches.

Meanwhile, it noted that schemes pursuing a run-on strategy may have greater flexibility to allocate to higher-returning, more illiquid assets, such as renewables, natural capital, or social housing, where measurable real-world impact can be achieved.

For consolidators, Isio suggested that ESG integration should be assessed in the context of the specific vehicle being considered, including its investment philosophy and stewardship priorities, with the potential for ESG-linked terms to be agreed during the transfer process.

Thomas concluded that "structured and proactive ESG integration supports asset resilience, minimises volatility and protects long-term member outcomes".

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