Trustees, take stock and plan for wider ESG risks and opportunities

As climate change reporting requirements become business as usual for many, it’s a good time for all trustees to think about how they could further develop their approach to managing wider environmental, social and governance (ESG) risks and opportunities.

ESG disclosure reporting requirements have expanded and that looks set to continue as practices around wider sustainability factors – such as nature and social – develop.

Business as usual

By now, climate reporting should be business as usual for those in scope, and fully integrated into day-to-day governance.

The first tranches of climate reports show what can be achieved with the right framework, guidance and regulation. There is increased awareness, debate and a better understanding of climate-related risks and opportunities in the pensions market, and potential transition pathways to more sustainable investment.

We have heard some say that reporting may get in the way of decision making and action. But the disclosures required should be the output of the strategic decisions that trustees are making.

Pensions operate in a complex world and trustees are increasingly being asked to grapple with new risks and grasp new opportunities. But the role of a trustee fundamentally remains to act in members’ best interests.

Our job is to use that disclosure and constructively challenge trustee decision-making so that savers’ interests are really being met.

The goal is not disclosure for disclosure’s sake but to encourage genuine change in how schemes operate. To see trustees, working with skilled advisers and embracing best practice, focussed on maximising the upside opportunities and mitigating the downside risks-that climate change presents.

Continuous improvement

Trustees should continue to improve their understanding of wider material ESG considerations, including their inter-relationship with climate change and, if appropriate, revise their scheme policies.

Trustees should already take into account financially material considerations over the appropriate time span of their investments. This is fundamental to delivering good saver outcomes. While there are no mandatory requirements to adopt recommendations from the UK Transition Plan Taskforce (TPT), Taskforce for Nature-related Financial Disclosures (TNFD) or Taskforce for Social Factors (TSF), trustees would do well to familiarise themselves with them. The TNFD recently posted a template in the form of an illustrative combined nature and climate-related disclosure report, which may be useful to trustees.

Transition plans

Transition plans provide a pathway to achieve sustainable investment. Good plans will support trustees, whether that be the integration of risks and opportunities into investment valuations or improving data and reaching informed decisions on investments so that there is increased capital allocation to climate solutions. Plans also set the direction and targets schemes need to mitigate risk and take advantage of opportunities. They provide interim milestones and actionable steps to achieve those targets and give a transparent, forward look to measure and report progress against. The UK’s TPT disclosure framework and guidance provides resource to support producing credible, consistent and comparable plans. Trustees should ensure their advisers have the appropriate skills and expertise so that they can make well informed decisions and put together effective transition plans.

Government wants to roll out transition plans across the economy and consult on this. Along with DWP’s planned post-implementation TCFD regulation review, this provides an opportunity for schemes to share experiences and shape disclosures and transition planning. Whether transition plans afford an opportunity for more effective disclosure compared with TCFD, as some suggest, is something to explore and discuss.

What next for trustees?

January’s World Economic Forum saw 320 organisations from some 40 countries accounting for US$14 trillion in assets under management committed to making nature-related disclosures based on TNFD recommendations. The direction of travel is clear. The case for becoming familiar with TNFD and arguably requirements of the TPT and TSF will only become stronger.

Evolving reporting to include nature and social factors, supported by transition plans and developments in TCFD reporting practices, may seem daunting. However, it should be possible by incrementally building on the foundations of TCFD.

We know data remains a challenge. Increasing the availability and quality of data should help trustees, advisers and policymakers make more informed decisions. But its absence should not stop action. A more qualitative narrative approach, building in expert judgement should allow trustees to act.

Trustees may wish to consider:

Becoming early adopters: Some schemes have committed to early adoption of TNFD reporting. Others have developed their statements and policies, for example, statement of investment principles (SIP), investment beliefs, responsible investment policies, to include nature-related risks and opportunities. It is important trustees report having regard to their own investment beliefs. 
Building on experience: Applying learning and experience from TCFD reporting, particularly on steps that can be implemented relatively easily and have ‘immediate’ impact. For example: 
- Where a scheme is supported by a covenant, ask covenant advisers about their skills, expertise and ability to assess the impact of nature and social factors on the covenant. Can they assess the impact on the scheme sponsor’s supply chain and the impact of that business’s activities (for example, double materiality). Covenant advisers could also be asked about their ability to assess a sponsor’s transition plan. 
- Set specific objectives for investment consultants relating to nature and social factors which the trustees consider to be financially material, tailored to their schemes and investments. 
- Integrate and embed consideration of these areas into scheme governance and risk management structures.
- Focus on initial actions that drive outcomes: then look to expand those actions as experience develops. For example, consideration of the full range of financially material nature-related risks and opportunities is complex, but by selecting and focusing on individual themes or sub-themes, such as, eliminating commodity driven deforestation from investment portfolios, trustees can build knowledge, extend engagement with their investment and service providers and drive progress.
Increase collaboration with others and share knowledge: Collaboration and knowledge sharing, such as that happening on scenario analysis involving groups such as Decision Useful Climate Scenarios (DUCS), the Climate Financial Risk Forum (CFRF) and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), is essential.

ESG and related reporting is a significant challenge for trustees, but failure to account for climate-related risks and opportunities and, where material, nature and social factors, puts savers at risk. It’s time schemes integrated ESG reporting into core governance operations to ensure they are fit for the future.