ESG can’t be ignored says UK’s Pensions Regulator ahead of new defined benefit guidance

The role of environmental, social and governance factors in pension fund investment has received one of its clearest regulatory endorsements so far, with the head of the UK Pensions Regulator stating that ESG “can’t be ignored”.

Lesley Titcomb, acknowledging trustees’ confusion in the area, said the regulator would be launching guidance for the defined benefit (DB) space early next year that would be “congruent and aligned” with the Law Commission.

She was referring to the Law Commission’s 2014 report on fiduciary duty that found that trustees should take ethical or ESG issues into account where they think they are financially material.

Titcomb, Chief Executive at a watchdog that oversees occupational pension schemes worth a combined £1.8trn (€2.1trn) on behalf of 32m people, was speaking at the 25th anniversary annual lecture of UKSIF, the UK Sustainable Investment and Finance Association.

The new guidance will come on the heels of earlier guidance for the defined contribution segment that UKSIF CEO Simon Howard has termed a “charter for ESG investment”.

Titcomb went on to say: “We are not requiring trustees to take a moral view on investments, nor are we asking trustees to take their personal beliefs into account” (for example in regard to fossils fuels or tobacco).She referred to a recent survey in industry magazine Professional Pensions which showed the pensions industry failing to take stock of the financial risks of climate change which she said was “interesting – not to say a little bit disturbing”.

Titcomb, the former Chief Operating Officer at the Financial Conduct Authority who took on her role early last year, pointed out that the updated European pension directive, which contains ESG provisions, would become a legal requirement.

The revised directive, officially the Institutions for Occupational Retirement Provision or IORP2 as it’s known, is set to go to a vote at the European Parliament plenary session next week (November 22). If it passes it would in Titcomb’s become a “hard legal requirement” to take ESG issues into account.

IORP2 of course comes in the context of what Titcomb jokingly referred to as “the ‘B-word’ I’m not going to mention [Brexit]”.

Referencing the recent decision by the HSBC pension fund to go into a Legal & General climate fund, Titcomb concluded: “ESG cannot be ignored.”

Meanwhile, her former employer the FCA has proposed sweeping changes to the asset management sector. The FCA is calling for an all-in fee so clients can compare charges and a greater use of benchmarks to assess performance.