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DC schemes fail to comply with new ESG rules

10 Feb 2020

Two thirds of defined contribution (DC) pension schemes have failed to update their statement of investment principles (SIP) under the new ESG disclosure rules, a sustainable investment campaigner has revealed.

The majority of pension scheme trustees have adopted a “thin and non-committal” approach to managing environmental risks, with smaller and medium-sized DC schemes having the highest rates of non-compliance, according to the UK Sustainable Investment and Finance Association (UKSIF).

Ben Nelmes, head of public policy at UKSIF, described the rate of compliance as “appalling”.

He said that there are several reasons why this is concerning. “First, schemes cannot be held to account on the quality and appropriateness of their policies on financially material factors if they do not publish their SIPs.

“Second, if the new requirement to publish a SIP has gone unnoticed by trustees, this could indicate that they have missed, or even ignored, other parts of the regulations, and are failing to prepare policies to manage financially material risks to people’s pension savings,” he added.

Yet despite these shortcomings, there is no certainty that The Pensions Regulator (TPR) will force schemes to meet their obligations under the new rules.

“We may take action against schemes where a failure to engage with climate risk and other ESG requirements appears to be part of a pattern of wider governance failings,” a spokesperson for TPR said.

Going forward, the regulator intends on telling schemes directly what improvements it expects to see, identify non-compliance and set plans for when it will routinely enforce the requirements.

The new rules, which came into force in October 2019, implementing the EU Shareholder Rights Directive, require all pension schemes to disclose their ESG stewardship measures in their statement of investment principles (SIP).

Trustees are now required to disclose how they incentivise investment managers to invest for the long term and factor ESG criteria into their decisions. From October 2020, schemes will also have to report on their voting behaviour and explain how they have implemented their ESG standards.

However, the majority of DC funds responded to these new requirements by stating that they were invested in pooled funds and that a single investor cannot make an asset manager change their investment policy.

In addition, as of 2017, some 85% of DC investments were held in passive equity strategies, according to Cass Business School, resulting in limited exposure to individual companies.

Following on from that report, which was based on a survey of 70 UK DC schemes, UKSIF called on the regulator and the government to educate trustees about the financial risks of climate change. Among others, the industry group wants the government to establish a central registry to host trustees’ ESG policies, similar to the Modern Slavery Registry that was established in 2015.

The regulator said that is working to educate trustees on climate risks as it intends to launch a new consultation on the SIP guidance. This will be based on the framework of the Taskforce on Climate-related Financial Disclosures (TCFD) which will be launched at the PLSA investment conference in March.

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