UK pension fund trustees must now weigh ESG and climate change risks more explicitly, under new rules which came into effect a few weeks ago. The UK Pensions Regulator says climate change is a core financial risk that trustees will need to consider when setting investment strategy.
As a result, ESG (environmental, social and governance) considerations are expected to play a bigger role in manager selection and monitoring. Schemes will be required to outline their policy on stewardship, including how they engage with investee firms and how they exercise voting rights.
UK pensions minister Guy Opperman has spoken of “the government’s game-changing regulations clarifying and strengthening pension scheme trustees’ environmental, social and governance responsibilities”.
Speaking at an event during July’s London Climate Action Week, he said pension funds 'must play a massive role' in the UK government's plans to achieve net-zero greenhouse gas (GHG) emissions by 2050.
And in the foreword to a new guide for trustees from the PLSA, the UK’s pension fund association, Opperman also said forthcoming government action on climate change will affect the valuations of companies that are not adapting best practices. This will have implications for both defined contribution (DC) and defined benefit (DB) pension schemes, he said.
The new regulations
From October 2019, pension scheme statements of investment principles (SIPs) must include policies on:
financially material considerations, including ESG considerations such as climate change;
stewardship of investments, such as exercising rights (including voting rights) and engaging with activities in respect to the investments;
the extent, if at all, to which non-financial matters, such as members’ ethical views on ethical or environmental matters, are considered when planning investments