Findings from our review of statements of investment principles (SIPs) and implementation statements (ISs).
Published: 30 July 2024.
This report sets out findings from our review of how pension scheme trustees are complying with their environmental, social and governance (ESG) duties, including in respect of climate change.
It is designed to help trustees and their advisers understand what is expected of them when meeting their ESG duties, including acting on the risks and opportunities of climate change.
Key findings from our review
While the vast majority of trustees are meeting their ESG-related disclosure requirements, our deeper analysis shows many are only delivering minimum compliance.
- Trustees often failed to demonstrate ownership of their policies or key activities in respect of ESG.
- Broadly, where trustees delegated activities to managers, trustees often failed to explain or demonstrate oversight of ESG activities.
- Where schemes are invested in pooled funds, a number of trustees highlighted they had limited ability to influence underlying managers on decisions related to ESG.
Trustee duties
Trustees have a duty to make investment decisions that protect savers and are designed to bring good member outcomes. This means they have a fiduciary duty to consider financially material risks and opportunities, including in relation to climate change. Through ESG publication and disclosure requirements, trustees must demonstrate they are taking appropriate action to address these risks and opportunities.
Under the 2018 regulations, trustees of schemes in scope (around 3,500 schemes, which have more than 100 members) must publish a compliant SIP and IS on a website accessible to the public and available free of charge. They also need to provide a link to the website in the scheme return they submit to us.
SIPs
SIPs are required to disclose ESG policies in relation to three broad areas.
- Trustees' approach to financially material considerations and non-financial matters (if the trustees choose to take those into account). This includes how financially material ESG considerations, including in respect of climate change, factor into their investment decisions.
- Trustees' approach to their stewardship of the investments including in relation to undertaking engagement activities and the exercise of voting rights in respect of the scheme's investments.
- Trustees' arrangements with their asset manager(s) including how the arrangement incentivises them to align their investment strategy and decisions with the trustee's policies (including those in respect of ESG related financially material considerations and non-financial matters), as well as monitoring and evaluating their asset managers' performance.
ISs
In ISs, trustees of schemes in scope are required to explain how and the extent to which they have followed the scheme's policies on stewardship, including in relation to the exercise of rights, including voting rights and in undertaking engagement activities, set out in their SIP over the scheme year.
This must include:
- the most significant votes casted by the trustees, or on their behalf, during the scheme year
- a statement on the use of a proxy voter(s) (if any) during that year
There are additional requirements for trustees of schemes in scope which provide money purchase benefits. They include:
- a description of any review of the SIP undertaken during the year
- an explanation of any change made to the SIP during the year and the reason for the change, stating the date of the last review
How we carried out our review
In line with our climate change strategy we undertook a regulatory initiative in relation to SIPs and ISs. The review aimed to capture how trustees addressed ESG–related disclosure requirements.
We carried out three different types of review of SIPs and ISs. Each of these examined scheme compliance in increasing depth. They included:
- A quantitative review of around 3,500 scheme returns to check how many trustees in scope had provided a weblink to their SIP and IS disclosures.
- Using machine-reading to identify ESG related content, we analysed a representative sample of SIPs and ISs to identify whether the documents contained certain key words which were indicative of the ESG related content required under the regulations.
- Our deeper dive into SIPs and ISs involved an in-depth review of ESG related information provided by around 50 schemes.
Our recommendations for trustees are based on our three reviews.
Recommendations for trustees
Trustees should dedicate sufficient time and resource to preparing their SIP and IS
While our check of about 200 defined contribution and 3,300 defined benefit and hybrid schemes found around 99% provided publicly accessible weblinks to relevant ESG disclosures in their scheme return, our qualitative reviews indicated that many schemes only delivered minimum compliance in respect of detail and evidence of activity.
Trustees must take proportionate and appropriate action to mitigate risks
Our qualitative review showed that, generally, larger schemes and those with sponsoring employers that were actively and more broadly engaged with ESG issues, provided meaningful details which went beyond compliance. We were encouraged to see that some smaller schemes with relatively low levels of assets (up to £20 million) and relatively low membership also produced some very high-quality disclosures. They clearly demonstrated better practice.
While it's reasonable for trustees in scope to take a proportionate approach to ESG-related governance considerations, we urge them to consider whether only meeting minimum compliance with requirements is the most appropriate approach. Generally, trustees identified certain climate change and/or other ESG factors as financially material risk(s) to their investments. If a trustee considers these are financially material risks, then they need to consider what this means for saver outcomes. Savers may be at risk if trustees fail to take appropriate action in respect of financially material risks in respect of climate change. If trustees are concerned they lack expertise or governance scale to manage these risks, they should consider consolidating so that savers are protected.
Trustees must take ownership of ESG activities
Trustees must take ownership of the scheme's policies in relation to ESG. It is not enough for trustees to report that they have delegated these matters to asset managers. For example, in relation to engagement activities, the trustees' policy needs to include the methods and the circumstances under which the trustees would monitor and engage with their asset managers.
Broadly, where trustees delegated activities to asset managers or other in-house employees, many SIPs and ISs did not explain or demonstrate trustee oversight of asset managers' activities. We have seen good examples of SIPs and IS where the trustees voluntarily include additional details in relation to the level of delegation to each party and the manner in which the delegations would be monitored and assessed (including the frequency of that monitoring). Where the management of financially material risks and engagement and voting is delegated to the scheme's asset managers, we would still expect to see evidence of oversight by trustees. For example, regarding stewardship activities, trustees need to explain how they will monitor and engage with their asset managers about relevant matters, including environmental and social impact and corporate governance.
Trustees of schemes invested in pooled funds should review fund manager policies on ESG-related issues
The majority of schemes selected in our sample were invested in pooled funds. While it was encouraging that some trustees referred to reviewing and monitoring manager policies on ESG-related areas, often with support from their investment consultants, this was the minority of schemes. We found that even where trustees referred to reviewing and monitoring managers, there was often little detail provided on what this entailed. ISs were often lacking in clear, scheme-specific examples of what ESG-related voting and engagement activities had been undertaken during the reporting year. Trustees should aim to do more in this area to demonstrate that they are effectively managing financially material risks for their scheme.
Where schemes are invested in pooled funds, there are a number of options trustees can use to show that they are actively monitoring and engaging with their asset managers.
Trustees can:
- use existing resources like the UK’s Stewardship Code signatory list and reports, and the Pensions and Lifetime Savings Association (PLSA) Stewardship and Voting Guidelines, which may be used as a benchmark to hold asset managers to account
- request that their asset managers vote on certain issues in a particular way, consistent with the trustees' own stewardship priorities
- engage with prospective providers of asset and fiduciary management services on their engagement and voting activities and outcomes, and on their willingness to take into account expressions of wish or collective voting policies
- use collective voting policies (for example, like the AMNT’s Red Lines) which provide a set of voting policies covering a wider range of ESG issues and incorporate them into their contractual arrangements with asset and fiduciary managers
- engage with their asset or fiduciary managers at least annually to discuss voting policies and regularly set out their viewpoints and issues of interest ahead of each voting season; trustees should then follow up and check whether the managers' votes are aligned with the scheme's stewardship policy, themes and priorities
- join collaborative investor initiatives which can provide a forum for pension schemes to coordinate collective action and share stewardship best practice, such as Climate Action 100+
Trustees should provide more detail on policy to show they are considering specific ESG-related risks to their scheme
The adoption of detailed and specific ESG-related policies within trustees' SIP enabled trustees to demonstrate better engagement with risks and opportunities relevant to their scheme. For example, through better alignment of significant votes with the schemes' priorities and themes.
Trustees should provide more scheme specific detail on voting activity
Our review showed some trustees only provided weblinks to their asset managers' webpages on voting. Trustees should describe the voting activities carried out by or on behalf of them. We expect a summary of how they have satisfied themselves that the voting policies adopted by their asset managers are aligned in the interests of savers. We also want to see better practice on reporting how trustees exercise their voting rights, including a summary of scheme-specific voting information provided in ISs.
Trustees should provide more detail on asset management arrangements
Broadly, the provisions setting out the trustees' arrangements with asset managers were lacking detail around the inclusion of ESG or stewardship policies in incentive structures, or their consideration in the monitoring and evaluation of asset managers. This is an area that could have a clear impact on saver outcomes. In pursuit of better practice, we urge trustees to take a more thorough approach to assessing their arrangements with asset managers in order to protect saver outcomes.
Trustees should consider going beyond climate change reporting
While some trustees covered themes across the ESG spectrum, focus on climate change reporting were the most common. Trustees seeking to improve practice in this area should consider developing dedicated policies in relation to environmental factors beyond climate change. The taskforce on social factors recently provided a guide covering how to identify and monitor financially material social risks and opportunities. This will be helpful to trustees who aspire to do more.
As set out in our blog, although the only reporting requirement at the moment relates to climate change reporting, trustees may wish to consider voluntarily becoming early adopters of other types of reporting (such as reports on social factors or nature related reporting).
Our message to trustees
While our analysis showed the vast majority (99%) of schemes in scope provided us with weblinks to their SIP and IS, we would like to see more than minimum compliance in respect of the contents of the SIP and IS.
Trustees have a duty to protect savers by demonstrating they have considered financially material risks and opportunities specific to their scheme investments. Trustees should include appropriate levels of details in their reporting to demonstrate that they are effectively managing financially material ESG related risks. If trustees believe they lack the expertise or scheme governance scale to manage such risks effectively, they should consider whether consolidating their scheme could improve the way in which such risks are managed for their members.