Should pension schemes change the world?

What impact has ESG had on pension schemes? Can ESG concerns be squared with acting in the best financial interests of scheme members?

ESG will undoubtedly remain a hot topic of 2022 across all industries, but it is far from new to those involved with the day-to-day running of pension schemes.

Trustees of UK occupational pension schemes have been required by regulations since 2000 to record their approach, if they have one, to the ethical, social, and environmental impact of their investment choices. Since then, ESG has worked its way steadily up the social agenda, and role of pension schemes has expanded over the same time.

In the broadest terms, pension schemes rely on investments to produce the income they need to pay benefits to members in retirement. Some of the UK’s largest defined benefit occupational pension schemes are institutional investors with billions of pounds in assets invested in the UK and global economy. It is no surprise then that the government has legislated and regulated to ensure that ESG factors are included in pension scheme investment strategies to help drive forward the ESG agenda.

Greater engagement

As a result, trustees have become increasingly engaged in ESG matters – but it is not just because the law requires them to. Pension schemes do not exist in a vacuum and, as the general public also becomes increasingly engaged with ESG, trustees have been obliged to pay more attention to the impact of the collective consciousness on their schemes. For a growing number of people, the way in which their pension savings are invested is an important factor, and in recent years trustees have seen more interest in ESG-friendly investment options from their members.

None of this means that trustees – or other pension providers – are free to make investment decisions based on personal views or the perceived morality of certain investments. Trustees of occupational pension schemes have wide statutory investment powers but they are also subject to onerous investment duties. When it comes to ESG, those duties can often feel at odds with one another: a duty to consider ESG friendly investments, which might not always generate the same returns as their non-ESG counterparts, might seem contradictory to a duty to act in the best financial interests of members.

Understanding the investment obligations placed on trustees can be a difficult task in itself and balancing these competing obligations can be even less clear cut, especially when you consider that many trustees are volunteers, not pensions or investment specialists. Trustees are required to take, and understand, professional investment advice to help them look beyond general or personal perceptions of what might be deemed ‘good’ and ‘bad’ investment options, and consider carefully whether the ESG matter in question is a financially material consideration for their scheme.

In recent years trustees have seen more interest in ESG-friendly investment options from their members.

Pension schemes are to act as a leading force in implementing climate-related recommendations.


This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2024.



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