PLSA Issues ESG Compliance Guide for UK Pensions

New requirements for DB, DC plans take effect October 1.

The UK’s Pensions and Lifetime Savings Association (PLSA) has published a guide to help pension funds comply with the Department of Work and Pensions’ new environmental, social, and governance (ESG) requirements that will be coming into effect October 1.

The new regulatory requirements stipulate that trustees of all UK defined benefit and defined contribution pension plans with 100 or more members ensure that their plan’s statement of investment principles (SIP) includes their policy on how financially material factors such as ESG considerations are taken into account when making investment decisions.

“For many pension schemes, ESG factors are already central to risk management and investment decisions. However, not all schemes are moving at the same pace,” Brian Henderson, PLSA policy board member, said in a release. “The ESG Guidance should have something for all trustees; ranging from those schemes that are early in their journey looking for guidance to those already implementing their agreed policies and beliefs.”

SIPs will also have to contain engagement and voting activities in respect of investments, and engagement with managers employed by the trustees. Additionally, they will also have to include the extent that non-financial matters, such as member ethical views are considered, even if those matters are not considered.

The PLSA said that under the new requirements, trustees who ignore long-term financial consequences from ESG, climate change, and stewardship factors will need to justify why this does not harm investment returns or outcomes for their members.

The guide is designed to aid the trustees of some 30,000 pension plans managing nearly £2 trillion ($2.54 trillion) of assets. The PLSA said it is structured to reflect the “typical journey that trustees take to ensure that ESG, climate change, and stewardship factors are properly understood, formalized in a relevant policy and, where appropriate, reflected in broader decision-making.”

The guide was developed by a cross-industry taskforce launched in response to demand from the PLSA membership, and is intended to complement guidance to be published by The Pension Regulator.

Unrelated to the ESG guide, the PLSA has invited UK business leaders to meet with pension plans to discuss their reporting of employment models and working practices.

In a letter to the chairmen of the FTSE 100 companies, PLSA Chief Executive Julian Mund said the pension plans the association represents believe a company’s workforce is critical to its long-term success. He also said that understanding how a company treats its workforce is crucial to how pension funds decide which companies to invest in.

“It is the PLSA’s aim that these discussions will help UK companies to lead global best practice in relation to workforce disclosure and governance,” Mund said in his letter. “It is only through working together on this issue that investors and companies can both deliver significant improvements to millions of working lives as well as delivering better returns to investors.”

The letter follows a PLSA report published in April that found many companies fail to disclose workforce issues such as staff turnover, gender and ethnicity pay gaps, level of employee share ownership, and supply chain ethics beyond the minimum statutory requirements.

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