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Stuart O'Brien

Partner, Sackers

Lucy Swart-Mallett

Senior Associate, Sackers

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The developing ESG landscape has renewed the uncertainty over trustees’ fiduciary duties and how these should be applied in context of sustainability and climate change

The impact of climate change on pensions

The impact of climate change on pensions

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Stuart O’Brien and Lucy Swart-Mallett review the hurdles facing the trustees of pension schemes in regard to environmental, social and governance issues

The landscape that trustees of pension schemes must now navigate in relation to environmental, social and corporate governance (ESG) issues is growing ever more complicated as the industry and regulatory environment continue to advance. While trustees have largely got to grips with various regulatory changes since 2019, including requirements to disclose the trustees’ ESG policies in publicly available Statements of Investment Principles (SIPs), implementation statements and climate governance reports (to name a few), feedback from the regulator has indicated that there are still areas to tackle and obstacles to overcome. In addition, the continued development of the government’s Green Finance Strategy and the increased global focus on issues such as biodiversity, suggests that there will likely be more requirements coming down the track. In this article, we review what trustees are facing today and what we might expect going forward.

Fiduciary duty

Like any trustees, pension trustees are subject to various trusts law and fiduciary duties that they owe to their scheme beneficiaries. Long the subject of debate, in board terms, these duties require trustees to:

  • exercise their investment powers for their ‘proper purposes’, namely the provision of members’ pensions;
  • take account of factors which are relevant to that purpose, this will usually mean those that are financially material (this may be consideration of risks as well as returns); and
  • do so in accordance with the ‘prudent person’ test – broadly this is the principle that trustee investment powers must be exercised with the ‘care, skill and diligence’ a prudent person would exercise, when dealing with investments for someone else for whom they feel ‘morally bound to provide’.

Historically there has been much debate among lawyers and other commentators as to how trustee fiduciary duties might be interpreted, frequently oversimplified as a duty to ‘maximise returns’. The 1984 case of Cowan v Scargill gave weight to this interpretation. However, context is everything and the backdrop against which the trustees in that case were exercising their investment powers must also be considered. This is not to say that Cowan v Scargill is bad law, simply that one has to understand the meaning of the judgment in context. Cowan v Scargill is still good authority for the legal proposition that trustees must exercise their investment powers for their proper purposes (namely, to provide members’ pensions and not for politically motivated reasons), but it is wrong to understand the case as binding trustees to an absolute duty of return maximisation. This will be evident to anyone who has had to consider the ways in which trustees of defined benefit pension schemes now frequently make use of hedging instruments, bulk annuities and liability-driven investment strategies. Are these intended to ‘maximise returns’? Patently not. Do they nevertheless deliver on the purpose of ensuring that members’ pensions can be paid? Clearly so.

That said, trustees should always take into account any relevant matters that are financially material to their investment decision-making. These might include factors that are likely to contribute positively or negatively to anticipated returns. Equally, relevant matters may be related to whether a factor increases or reduces risk. The idea that the physical risks of climate change and society’s transition to a lower carbon future might pose a significant financial risk to pension schemes is now well established and where financially material to a scheme, should be considered by trustees in their investment decision-making, consistent with their trusts law and fiduciary duties.

The more difficult question is whether trustees can, or should, take other, potentially wider, issues into account, such as systemic market risks and beneficiary quality of life, or whether it is legitimate for them to pursue a strategy designed to deliver other objectives, such as net zero or other outcomes providing a positive environmental or social impact for society. In practice, we tend to fudge the issue by drawing a link between these objectives and a direct positive financial return (or reduction of risks) for the pension scheme, but pursuing those objectives for their own ends can quickly get trustees into legal difficulties. There are arguments that can be made for a broader consideration of what is a ‘relevant factor’ in a trustee’s investment decision-making, but this is a particularly difficult legal area and requires all trustees, and lawyers, to think more deeply about trustee duties going forward.

On 6 February 2024, the Financial Markets Law Committee published a paper ‘Pension Fund Trustees and Fiduciary Duties: Decision-making in the context of Sustainability and the subject of Climate Change’. The paper is intended to provide ‘a very general explanation of the legal position and the uncertainties and difficulties that exist’ in respect of these duties owed by trustees and ‘help trustees in their discussions with advisors’. As discussed, the developing ESG landscape has renewed the uncertainty over trustees’ fiduciary duties and how these should be applied in context of sustainability and climate change. Although this new paper does not change the legal interpretation of fiduciary duty it may give trustees cause to reflect on how they are considering the issue. In addition, the parliamentary Work and Pensions Committee has also recently sought industry views on the topic. There is no doubt that this is likely to continue to be a topic of considerable development in the years to come.


SIPs and implementation statements

The year 2019 was arguably a turning point for a cascade of regulation in respect of ESG and climate change for pension scheme trustees. Changes to the Occupational Pension Schemes (Investment) Regulations 2005 (‘the Investment Regulations’) imposed new requirements on trustees in preparing and updating their SIPs and, by October of that year, trustees were required to set out their policies in relation to ‘financially material considerations’ (defined to include ESG considerations and climate change) and stewardship. SIPs were also required to set out the extent to which ‘non-financial matters’ (for example, member views on ethical matters) were taken into account. By October 2020, additional changes to the Investment Regulations (implementing elements of the Shareholders Rights Directive II) required trustees to also include details in relation to arrangements with asset managers.

Simultaneously, from 1 October 2020 new requirements under the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 required trustees of schemes within scope to produce an annual ‘implementation statement’ setting out how they have acted on policies in the SIPs in the previous year. More recent guidance published by the Department for Work and Pensions (DWP) in June 2022, contains both ‘statutory’ guidance (generally on implementation statement content) and ‘non-statutory’ guidance (generally in relation to SIPs content). This guidance provides further recommendations for the content of the SIPs and implementation statement, with a key focus for implementation statements on voting and engagement (stewardship). Trustees should now be well accustomed with these requirements and how they apply to their specific schemes. However, this is not an area for complacency. A recent blog by the Pensions Regulator (TPR) in May 2023 (The ESG elephant is now in the room) confirmed that the regulator would be conducting a review of schemes’ SIPs and implementation statements beginning in the autumn of 2023. The review was expected to focus on the extent to which the DWP guidance has been adopted by trustees (and at the time of writing, a report has not yet been published).


As noted above, trustees now have defined regulatory obligations to articulate and report their policies on voting and engagement, stewardship. As part of the global response to climate change and other sustainability issues, trustees are being increasingly required and encouraged to improve their stewardship activities and this is certainly an area to watch. Reports in recent years by both the Taskforce on Pension Scheme Voting Implementation and the Investment Association have focused on giving pension savers a voice and embedding the relationship between investment managers and pension schemes.

In July 2022, the DWP published a long-awaited call for evidence on the consideration of social factors by pension schemes, seeking to encourage a more proactive approach to entrenching social factors within pension schemes’ investment decisions. A new minister-led taskforce was announced to support pension scheme trustees and the wider pensions industry in regard to some of the challenges around managing social factors. In March 2024, this taskforce published new guidance on how trustees might better integrate the consideration of social factors into their investment decision-making and stewardship policies. The taskforce also made recommendations for different stakeholders in the pensions sector, including that pension trustees should ensure their asset manager ‘considers social factors, and that these are integrated into the investment strategy and stewardship of investments’.

The Taskforce on Climate-Related Financial Disclosures (TCFD)

There have been equal, if not more, developments in respect of climate change following the publication of the TCFD recommendations in 2017. The recommendations established a set of clear, comparable and consistent disclosures through which climate-related financial risks and opportunities can be identified, assessed, managed and disclosed. The recommendations were built upon further with the government’s publication of its Green Finance Strategy and applied to pension schemes with the introduction of the Pensions Schemes Act 2021. The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (‘the Climate Change Governance Regulations’) were subsequently issued under the Act and focus on improving climate change risk, governance and reporting by pension scheme trustees, broadly following the recommendations of the TCFD.

The requirements under the Climate Change Governance Regulations were phased in, with the largest schemes (master trusts and schemes with net assets of £5 billion or more) being the first to comply from 1 October 2021 and schemes with £1 billion or more assets in compliance from 1 October 2022. Trustees of schemes within scope are required to put in place appropriate governance arrangements to manage climate-related risks and produce and publish an annual report on how they have done so. While the government has previously been at pains to stress that it was not telling trustees how to invest, the Climate Change Governance Regulations have ushered in a new era of mandatory ‘governance’ as well as required disclosures. For the first time regulations are prescribing what actions trustees must take and not only what they must disclose. Recent amendments to the Climate Change Governance Regulations also require trustees, from 1 October 2022, to calculate a new ‘portfolio alignment’ metric, setting out the extent to which the scheme’s investments are aligned with the Paris Agreement goal of limiting global warming to well below 2°C, and pursuing efforts to limit it to 1.5°C above pre-industrial levels. This must be calculated and reported on in addition to the three original metrics. The regulations will provide trustees with the flexibility to select the type of portfolio alignment metric that best reflects their circumstances.

The very largest schemes will now have published their second TCFD reports, with £1 billion+ schemes not far behind. In March 2023, TPR provided the first feedback on these publications, noting both some good practice but also identifying areas for improvement. A recurring problem is the patchy availability of underlying data that is necessary to report climate-related metrics (particularly the obligation to report scope three emissions of their portfolios in the second year of reporting). As a result, it is highly probable that the next wave of reports will describe significant data gaps, though TPR has indicated it is likely that data quality and coverage will improve over time.

How does this fit within the bigger picture?

Since 2019, the UK has been striving to achieve its goal to bring all greenhouse gas emissions to net zero by 2050. This is legislated for under the Climate Change Act 2008 and has set the backdrop for all the regulatory provisions set out above. There have been numerous moves to achieve this goal in recent years and more are expected. Although not yet legally required, many trustees are making their own voluntary net zero commitments in relation to pension fund assets, something that is becoming increasingly standard for those wanting to crystalise their ESG commitments. However, what a net zero commitment truly looks like in practice for pension trustees is still settling down.

Building on the government’s Green Finance Strategy, first published in 2019, HM Treasury published a policy paper Greening Finance: A Roadmap to Sustainable Investing in 2021. The paper sets out the UK’s ambition to ‘green the financial system and align it with the UK’s world-leading net zero commitment’. In November 2023, the Financial Conduct Authority (FCA) published a Policy Statement on Sustainability Disclosure Requirements (SDR) and investment labels. Applying predominantly to FCA-regulated entities, the final package of measures includes a new general anti-greenwashing rule and new product labelling rules to assist consumers in navigating the investment product landscape (among other requirements). This has an indirect impact, for the time being, on trust-based pension schemes via the investment products in which a scheme invests. In time, however, pension scheme trustees themselves may well be brought directly within the SDR reporting requirements.

The ESG regulatory landscape is further expanding with the publication, in September 2023, of the Task Force on Nature-Related Financial Disclosures (TNFD) final framework and recommendations. The recommendations are intended to be used by all organisations, including pension schemes, to report and act on nature-related risks, with the aim of supporting better risk mitigation and help ‘identify, assess, manage and, where appropriate, disclose nature-related issues’. The recommendations are voluntary, and it is arguably still too early for pension schemes to put in place any detailed approach to identifying and addressing nature-related issues. Indeed, the challenges with data prevalent in TCFD reporting are likely to be even greater for more nascent and disparate nature-related metrics. However, given the direction of travel with regard to the SDR and recent public statements by the government in this area, some form of disclosures in line with the TNFD framework may become a requirement in the future. The government announced, in its Green Finance Strategy, that it will explore how the recommendations should be incorporated in the UK. We wait and see.

It is clear that there is, and is expected to be, more legislation and associated guidance from an array of government and industry bodies to embed ESG considerations into pension trustee investment decision-making and reporting. As we creep further towards the 2050 target for the UK to reach net zero, and ESG issues and related regulations continue to have an impact across the economy, it is expected we will see more movement on all the issues, requirements and obligations raised above.