ESG for pension schemes: now and next - May 2020 - allenovery.com - Allen & Overy
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
ESG for pension schemes:
now and next
May 2020
allenovery.comESG for pension schemes:
now and next
The global health crisis has changed In the ‘next normal’ where we live It is widely expected that national
our perspectives in almost all with Covid-19, or even move beyond governments will seek to stimulate
areas of daily life and business. it, it seems likely that ESG will be recovery with a ‘green’ and
Further change and evolution is reshaped, with ‘S’ and ‘G’ continuing stakeholder focus, and that investors
still to come, but it’s clear that to receive increased attention, may ask hard questions about
the effects of the pandemic have and focus on different aspects, corporate governance and resilience,
reconfigured how we look at a whole than has been the case to date. once the immediate crisis begins to
range of environmental, social and recede. For strategic and practical
Meanwhile, pension scheme
governance (ESG) issues. To date, reasons now is a good time,
trustees are preparing for changes
the focus for pension schemes for schemes that have the capacity,
to disclosure requirements on
has been mainly on the ‘E’ of ESG, to focus again on investment beliefs
investment governance issues,
covering various environmental and on the information flows you
stewardship and engagement
issues and, specifically, climate- are getting from your investment
from 1 October 2020. We also
related risks that are financially consultants and asset managers.
expect additional requirements and
material to pension scheme
guidance in the near future on ESG In this briefing we provide a reminder
investment decisions. The ‘S’ of
issues – and in relation to climate of what regulatory changes are
ESG is now firmly on the agenda for
change in particular. Trustees are in place already, what’s still to
corporates, pension schemes and
rightly focusing on key operational come, and some thoughts on how
asset managers, and the importance
priorities at the moment – but it’s investment beliefs, and the strategies
of governance as the underpinning
also important to ensure that you are that flow from them, may be
framework is also clear.
ready for these forthcoming changes, reconfigured in light of Covid-19.
and have the right groundwork
in place.
“The objective of the new disclosure requirements
for pension schemes is to make more active
stewardship part of ‘business as usual’ for
schemes, either directly or via investment
managers, and to ensure (in the Regulator’s words)
that ‘action follows intent’.”
Neil Bowden, Partner
2 ESG for pension schemes: now and next | May 2020Current action points
Climate change: consultation on industry guidance
The government has stated that trustees may need to adopt robust horizon and their potential impact,
by 2022 all listed companies governance procedures as a first together with how you identify and
and large asset owners should step, before starting to consider assess materiality in this context;
make disclosure in line with the the disclosure elements. and your view of resilience to
recommendations of the Financial However, the government’s different scenarios (including relevant
Stability Board’s Taskforce on view is that schemes should not metrics). It will include commentary
Climate-related Financial Disclosures need regulations in order to start on your due diligence regarding
(TCFD). The Pensions Regulator actively working towards the TCFD stewardship activities, including where
(TPR) views climate change as recommendations and reporting on these are delegated to asset managers,
a ‘core financial risk’ relevant to their progress. The Code is intended in order to hold managers and
standards of governance and risk to ‘lay the groundwork and develop investee companies to account.
management by schemes. good practice’ for disclosure and
Consideration of the draft guidance
Although the timelines have slipped will be updated once TPR publishes
may also be a useful exercise in
due to the pandemic, there is its governance Code of Practice
identifying principles to be applied
currently an open consultation on (see further below), which will include
more widely – for example, to
non-statutory industry guidance on guidance on climate-related issues.
support a review of your governance
TCFD disclosures.
What’s the impact for schemes? practices and the information and
The draft guidance covers assessing Compliance with the guidance metrics available to you, and to help
and managing climate-related risks (at least in its current form) is likely with assessing the resilience of your
as well as reporting aspects. to require significant time investment investment strategy to current
It acknowledges that TCFD and additional documentation – market shocks.
compliance will be very challenging for example, a record of the main
for some schemes, and that risks and opportunities for each time
The consultation on the guidance
closes at 11:45pm on 2 July 2020 –
although it would be easy for this
to slip under the radar, it’s worth
making time if possible to consider
the implications for your current
practices and respond to the
consultation if appropriate.
allenovery.com 3SIP reviews and the implementation statement
Most UK pension schemes reviewed From 1 October 2020 the ‘relevant If it says that the voting policies
and/or updated their statement of persons’ category will be widened of asset managers are reviewed
investment principles (SIP) and ‘relevant matters’ will have ‘regularly’, what does that mean? If
during 2019, to comply with updated to include an issuer’s capital they are reviewed annually, does that
requirements relating to ESG issues structure and its management happen in practice? You will need
and stewardship matters. A further of actual or potential conflicts of to set out in your implementation
review is required before 1 October interest (as well as matters such statement whether or not you have
2020 to ensure that the SIP covers as performance, strategy, risks, carried out these reviews in the
the trustees’ arrangements with social and environmental impact, relevant year, how you did it and
asset managers, including how those and corporate governance that are what you found – so it’s worth
arrangements promote alignment already covered). ensuring that commitments in
with the scheme’s investment the SIP reflect your intentions
The requirement for schemes with
strategy, and information about the and practice.
100+ members to publish an
remuneration and monitoring of asset
implementation statement in the next As part of this process, you may
managers. In addition, your policy
scheme annual report published on identify gaps in your data (for example
on engagement should already state
or after 1 October 2020 is a further on voting and engagement activities),
‘the circumstances under which
consideration during your review of where you will need additional
you would monitor and engage with
the SIP. When you come to write information from your investment
relevant persons about relevant
your implementation statement, it will consultants and managers.
matters’, but this element is
be important that the SIP accurately Our briefing ‘The implementation
being extended.
reflects your intentions and actions. statement: how to prepare for it’
sets out a list of questions to help
you get started.
– Ensure that your scheme SIP will
comply with statutory requirements
from 1 October 2020.
– Depending on the date of publication
of your next annual report, start
gathering information to prepare
the implementation statement.
4 ESG for pension schemes: now and next | May 2020Implementation statement content requirements:
DB or DB + AVC The annual report must include a statement that:
schemes with
– sets out how, and the extent to which, the trustees’ policy on the exercise of rights
100+ members
(including voting rights) attaching to investments, and engagement activities, has been
followed during the year; and
– describes the voting behaviour by, or on behalf of, the trustees (including the most
significant votes cast) during the year and states any use of the services of a proxy voter
during that year.
Relevant DC schemes1 The annual report must include a statement that:
with 100+ members
– sets out how, and the extent to which, the SIP (including the policy on voting and engagement)
has been followed during the year;
– describes any review of the SIP undertaken/any changes made to the SIP during the year
and the reason for any change, and the date of the previous review if there was no review
during the year; and
– describes the voting behaviour by, or on behalf of, the trustees (including the most
significant votes cast) during the year, and states any use of the services of a proxy
voter during that year.
Trustees must publish the The government’s intention is that schemes aim to do, and that
implementation statement online ‘requiring trustees to report on how schemes act on the principles
(at the same time as, or after, they have followed their investment they set out’.
the annual report – the final deadline principles will ensure that the text
for publication is 30 September 2021) [of the SIP] reflects what pension
and tell members about its availability.
“The new requirements will enable members,
campaign groups and others to scrutinise and compare
approaches across the market. We expect to see approaches
evolving over time. The Regulator has also suggested
including additional content such as ‘lessons learned’
about specific issues (on a voluntary basis).”
Jane Higgins, Partner
1 ‘Relevant DC schemes’ means, broadly, DC schemes with more than 12 members but excluding AVC-only arrangements and public service schemes.
allenovery.com 5Strategic objectives for investment consultancy providers
As a side-note, from December 2019 were in place. The regulations are The CMA rules provide that trustees
many schemes fell within the scope still expected at a later date, must not enter into a contract for
of new rules from the Competition but the timing is uncertain. IC services (or continue to obtain
and Markets Authority requiring these services) unless they have set
–U
nder the DWP regulations, the
trustees to set strategic objectives strategic objectives for the provider.
mechanism for annual reporting
for investment consultancy (IC) ‘IC services’ has quite a broad
would be the scheme return –
providers. Regulations establishing a definition and includes ‘any matters
but under the CMA rules that
similar (but not identical) replacement in respect of which the Pension
currently apply, trustees must
regime were due to take effect from Scheme Trustees are required by
submit a compliance statement
April 2020, and regulatory guidance law to seek advice in relation to
to the CMA by 7 January 2021
was to be updated accordingly. the preparation or revision of the
confirming the extent to which
Due to the intervening impact of the statement of investment principles’.
relevant parts of the Order have
global health crisis, those regulations As a result, if your scheme has
been complied with. The form of
have not yet been published. sought advice from a new provider
the compliance statement is set
in relation to changes to the SIP and
There are a few points to out in the Order; trustees must
the scheme falls within the scope
watch here: also provide a certificate stating
of the regulations, you are required
that they have complied with
– Many schemes were expecting to have appropriate objectives in
the Order in all material respects
review their initial set of strategic place. The CMA Order also includes
during the period, and reasonably
objectives this year in line with a requirement to report any non-
expect to continue to do so. This
the expected regulations, and for compliance (for example, obtaining
will generally be signed by the
schemes with in-house investment relevant services without having
Chair of trustees. These reporting
consultants that were exempt from strategic objectives in place)
provisions will apply to in-scope
the CMA rules, the regulations within 14 days of becoming aware
schemes unless the CMA Order is
would have been the trigger to of the failure to comply.
superseded by regulations.
ensure that appropriate objectives
ESG: the changing outlook
Stepping back for a moment For some schemes, a wider review Have your investment beliefs altered
from the compliance obligations of investment beliefs and strategy as a result of recent events? What
mentioned above, many schemes may be appropriate, especially in evidence have you gained about
will be monitoring key investment view of the increasing disclosure the resilience of your strategy and
strategy issues very carefully in requirements around ESG issues. the sustainability and approach of
the light of market volatility in investee companies?
recent weeks.
6 ESG for pension schemes: now and next | May 2020Environmental
Issues including: “Governments are increasingly seeing their ‘Covid-19 and climate change present a
Climate change recovery programmes as a unique opportunity collision of systemic crises which should
Extreme weather events to divert public and private sector funds into be managed simultaneously to reinvigorate
more sustainable investments. Despite initial and decarbonize the global economy. Action
Biodiversity loss
concerns, it seems clear that Europe intends taken now to mitigate the negative effects of
Deforestation to use this as a way of driving forward the both systemic threats will materially reduce
Resource depletion Green Deal agenda. We may ultimately the magnitude of the impact experienced by
Pollution, emissions look back and see this period as a future generations.’
Waste tipping point.”
ICGN Statement of
Natural resource management Matt Townsend, Partner Shared Governance Responsibilities
Sustainability during the Covid-19 pandemic
Social
Issues including: “The current global health crisis has pushed ‘Understanding how a company treats its
Working conditions workforce and supply chain issues even more workforce is… crucial to pension funds’
Health and safety substantially into the foreground. decisions about which companies they invest
Apart from the potential reputational damage in... and we believe should figure prominently
Income equality
for companies that are judged (perhaps with in companies’ annual reports.’
Human rights
hindsight) to have treated staff and suppliers Pensions and Lifetime Savings
Modern slavery poorly when the crisis hit, there is a huge Association, June 2019
Child labour emphasis on keeping workers safe and valuing
Employee/customer relations their contributions on their return to work
Community engagement post-lockdown – and, for customer-facing On 29 April 2020, the European
businesses, ensuring public safety. Corporates Commissioner for Justice, Didier Reynders,
Reputation
that fail to rise to the challenge could be announced that the European Union plans
Conflict zones/conflict minerals
weakened as a result. to develop a legislative proposal by 2021
Conversely, some companies will have gained requiring businesses to carry out due
public and stakeholder confidence through diligence in relation to the potential human
their approach to the crisis.” rights and environmental impacts of their
Suzanne Spears, Partner operations and supply chains.
Governance
Issues including: “Organisations are facing unprecedented “Cyber security/resilience is increasingly
Shareholder rights challenges in Covid-19 and climate seen as a governance risk that should be a
Accounting and reporting change. Corporate governance was priority for investors, because of the severe
Executive pay already high on the agenda, and is more business disruption, as well as financial and
Bribery and corruption so now. Underpinning how effectively an reputational damage, that can be caused
Money laundering organisation responds is good governance, by a breach. Cyber security risks may be
including risk assessment, checks and financially material, but recent reporting
Board diversity and structure
balances, and informed decision making.” suggests that there is little consistency in
Gender pay gap, diversity and inclusion
James Roe, Partner how these risks are taken into account
Data protection and cybersecurity
by asset managers in their engagement
‘Investors will seek assurance on the activities, and that they may not be
competence of board directors in steering routinely covered in sustainability and
The International Corporate Governance
Network has published a statement of through this crisis… Demonstrating stewardship reports.”
Shared Governance Responsibilities during resilience as a complement to sustainable Andy Cork, Partner
the Covid-19 pandemic, aimed at both value creation is a new priority.’
corporates and investors. Among the issues
ICGN Statement of
it highlights are: Shared Governance Responsibilities
– social responsibility, including treatment during Covid-19 pandemic
of the workforce
– resilience and sustainability
– an holistic, equitable and long term
approach to capital allocation.
allenovery.com 7Future regulatory change
Pension Schemes Bill: further disclosure requirements to come
For the moment, TCFD-style The proposed legislation would pave effects of climate change (including
disclosures are voluntary, but further the way for regulations to (a) require risks and opportunities). This may
climate change risk management trustees to publish climate change- (at least initially) be limited to large
and reporting requirements for related risk information and (b) pension schemes, but no details
trustees are included in the current impose other requirements with the of any scheme size thresholds for
Pension Schemes Bill. aim of ensuring effective governance disclosure are yet available.
of the scheme with respect to the
Requirements may include:
– reviewing the exposure – assessing the assets – developing and reviewing – reporting requirements
of the scheme to certain of the scheme in a targets relating to the
risks (and developing prescribed manner; scheme’s exposure
and reviewing a strategy to certain risks and
for managing the measuring performance
risk exposure); against these targets; and
Trustees would be required to have regard to statutory guidance when complying with the regulations,
and non-compliance could result in a compliance notice or fine.
IORP2 and the governance Code of Practice
Further governance requirements The expected consultation on a new and, in relation to the scheme’s own-
are on the way, courtesy of IORP2. Code of Practice, setting out the risk assessment:
The Pensions Act 2004 was Regulator’s expectations in this area,
– where environmental, social and
amended from 13 January 2009 has been delayed, but we know that
governance factors are considered
to provide that: ‘The trustees or the code will include guidance on
in investment decisions, how the
managers of an occupational (among other things):
trustees or managers assess new
pension scheme must establish
–h
ow a scheme’s effective system or emerging risks, including risks
and operate an effective system of
of governance should include relating to climate change, the use
governance including internal controls,
consideration of environmental, of resources and the environment;
which must be proportionate to the
social and governance factors social risks; and risks relating to the
size, nature, scale and complexity
related to investment assets in depreciation of assets as a result of
of the activities of the occupational
investment decisions; regulatory change.
pension scheme.’
8 ESG for pension schemes: now and next | May 2020Further guidance on the way
The Pensions Regulator has put together with a voting behaviour For more help with preparing your
most of its regular programme of template for asset managers. implementation statement, please
work on hold during the current This is designed to help trustees to see our March 2020 guide:
health crisis, so it’s not clear when compare engagement and voting ‘The implementation statement:
further guidance or consultations behaviour and to produce their own how to prepare for it’.
may be published. disclosures, and the aim is that this
will be available in time for summer
In relation to implementation
trustee meetings – though as
statements, the Pensions and
outlined above, trustees should not
Lifetime Savings Association has set
wait until then to start considering
up an industry group that aims to
the issues.
produce guidance on good practice,
Action points
– This may be an opportunity – Consider information flows and monitoring in light of an
to pause and review expected strengthening of focus on ESG issues and the
your investment beliefs forthcoming implementation statement requirements.
and strategy - are these Are you getting the information you need to comply
changing in light of the with your duties (which in turn depends on what you
pandemic? How resilient plan to report)?
has the scheme’s strategy
proved to current
market shocks?
– Review whether any – Review your voting and – Consider how ready your
adjustments are required stewardship approach, scheme is to apply the
to strategic asset and whether any changes TCFD recommendations
allocation and mandates are required to implement and plot a course
for asset managers your investment beliefs towards future
and advisers. and strategy. disclosure requirements.
allenovery.com 9Contacts
Matthew Townsend Suzanne Spears James Roe
Partner, Global Co-Head of the Partner, Litigation and Arbitration, Partner, Corporate and
Environmental Law and Global Co-Head Business and Equity Capital Markets
International Trade Groups Human Rights Group Tel +44 20 3088 4637
Tel +44 20 3088 3174 Tel +44 20 3088 2490 james.roe@allenovery.com
matthew.townsend@allenovery.com suzanne.spears@allenovery.com
Neil Bowden Jane Higgins Andy Cork
Partner, Corporate Pensions Partner, Corporate Pensions Partner, Corporate Pensions
Tel +44 20 3088 3431 Tel +44 20 3088 3161 Tel +44 20 3088 4623
neil.bowden@allenovery.com jane.higgins@allenovery.com andy.cork@allenovery.com
Jason Shaw Jessica Kerslake Helen Powell
Counsel, Corporate Pensions Counsel, Corporate Pensions PSL Counsel, Corporate Pensions
Tel +44 20 3088 2241 Tel +44 20 3088 4710 Tel +44 20 3088 4827
jason.shaw@allenovery.com jessica.kerslake@allenovery.com helen.powell@allenovery.com
10 ESG for pension schemes: now and next | May 2020allenovery.com 11
GLOBAL PRESENCE
Allen & Overy is an international legal practice with approximately 5,500 people, including some 550 partners, working in over 40 offices worldwide.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. Allen & Overy LLP is a limited liability partnership registered in England and Wales
with registered number OC306763. Allen & Overy (Holdings) Limited is a limited company registered in England and Wales with registered number 07462870.
Allen & Overy LLP and Allen & Overy (Holdings) Limited are authorised and regulated by the Solicitors Regulation Authority of England and Wales.
The term partner is used to refer to a member of Allen & Overy LLP or a director of Allen & Overy (Holdings) Limited or, in either case, an employee or
consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings.
A list of the members of Allen & Overy LLP and of the non-members who are designated as partners, and a list of the directors of Allen & Overy
(Holdings) Limited, is open to inspection at our registered office at One Bishops Square, London E1 6AD.
UK
© Allen & Overy LLP 2020. This document is for general guidance only and does not constitute definitive advice. CS2005_CDD-59943_ADD-90075You can also read
