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Pension scheme investments and ESG – a year in the making

30 September 2020 | London
Deals and cases

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One year since pension schemes with more than 100 members were required to disclose the risks of their investments, with a focus on environmental, social and governance (ESG) considerations, Michael Aherne, Of Counsel in Herbert Smith Freehills’ pensions practice, argues that the “initial scepticism has given way to a growing realisation that the risks associated with paying lip service to the requirements are too high.

He says: “Twelve months ago it would be fair to say that the new ESG requirements were met with scepticism. Many in the sector were concerned that schemes would treat the need to have ESG policies as a tick box exercise.

Yet, as we approach the first anniversary of the new regulations, that position is becoming increasingly untenable as the focus on ESG risks continues to increase, driven by policymakers, regulators and pressure groups. At the same time sponsors are driving change, concerned about reputational and financial risks if their pension scheme is not in step with corporate values." 

Focusing on how pension trustees and asset managers are responding to recent legal and regulatory changes relating to pensions and ESG, Aherne adds:

The big question now is ‘what next?’.  It is clear that those who assumed ESG was nothing more than bureaucratic expediency will need to think again, especially with the Government setting out its intention to go further and introduce mandatory governance and disclosure requirements for climate change risks.  

Although these new requirements are expected to initially only apply to the largest UK pension schemes, it seems likely that in time all but the smallest schemes will be subject to them in some form. For trustees, as they prepare their first implementation statement, they should recognise this as the start of a journey. Assessing and monitoring ESG risks is not just about an annual disclosure statement but about embedding the consideration of such risks in their governance , risk management and investment decision-making processes generally."

Aherne’s comments come as Herbert Smith Freehills releases its latest podcast. Focusing on the evolving landscape of pensions and ESG,  it offers practical tips on how trustees should go about preparing their new investment implementation statements and highlights expectations for how this area is likely to develop in the coming years.

The podcast can be accessed here.

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For further information on this news article, please contact:

Mike Petrook, Communications Manager

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