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Clarifying and strengthening trustees investment duties on ESG and climate risk

I am writing to you to remind you of the amendments to the Investment and Disclosure regulations which come into force on 1 October 2019. With this package, I have sought to put beyond doubt:

• the duties for pension scheme trustees to take account of financially material considerations arising from environmental, social and governance (ESG) considerations, including climate change 鈥� just as they would any other financial risk
• the requirement to have a policy on stewardship of the assets, including both engagement and voting, however the assets are held
• the requirement to have a policy on how members鈥� views are taken into account, although I have been clear that trustees are never obliged to take account of members鈥� views

I believe that the circumstances in which neither climate risks, nor ESG risks more broadly, are financially material are likely to be extremely limited 鈥� and therefore that it is part and parcel of trustees鈥� fiduciary duties to take account of these risks when setting out investment strategy and to clearly explain that to investors. In the same way, I believe it is part of trustees鈥� fiduciary duties to have a stewardship policy, even if that policy is limited to engagement and monitoring of the asset managers who engage with investee firms and vote on trustees鈥� behalf. Finally, the Law Commission have twice concluded that trustees can take account of members鈥� views where the 鈥渢wo step test鈥� is met.

In light of the coming into force of the Regulations, and Government and Parliamentary interest in pension scheme investment, I am writing to ask some further questions about the actions undertaken by your scheme.

Question 1:

What substantive changes have you made to your investment strategy in the last 3 years to take account of ESG and climate change and when have you made them?

Question 2:

What substantive changes have you made to your stewardship policy in the last 3 years to ensure that the pension scheme trustees act as engaged investors?

Question 3:

Have you made any substantive changes to your policy on taking account of members鈥� views in the last 3 years? If so, what changes have you made and when did you make them?

Question 4:

Are you planning to make any further changes to your strategies and policies on the above topics in the next 12 months?

Question 5:

Does your scheme make climate disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework? What aspects of TCFD鈥檚 recommendations do you meet? Do you plan to meet more in the next 12 months?

Question 6:

Are there further specific actions government might take to impress upon pension schemes 鈥� or others 鈥� the materiality of climate change risk and how it might be minimised. If so, what are those actions?

Question 7:

Who are your asset manager/s and do you believe they are truly acting on the changes I and government are seeking?

Question 8:

Finally, I would appreciate sight of the ESG/climate change, stewardship and non-financial factors (members鈥� views) section of your statement of investment principles, or details of where these are published online. I am compiling a record so I can both monitor compliance and celebrate and support best practice.

Guy Opperman MP
Minister for Pensions and Financial Inclusion