More sustainability disclosure requirements coming to pensions?

In his Mansion House speech on July 1, Rishi Sunak announced that the government will launch “new requirements for businesses and financial products to disclose sustainability information”. Pension schemes are mentioned as being among those that will be in scope.

We know that greening the UK economy is a high priority for the government. Brexit may be a factor here too.

The EU is putting in place a wide-ranging Sustainable Finance Disclosure Regulation, just one part of an ambitious action plan on sustainable finance — which includes a raft of other legislative measures such as the taxonomy regulation, a forthcoming social taxonomy, and the proposed EU green bond standard.

A key trustee concern about this will be duplication of obligations. It’s highly likely that some pension schemes will be in scope for both this new regime and the climate change regulations

However, post-Brexit, neither the SFDR nor the taxonomy regulation will be automatically incorporated into UK law. 

Our current assessment is that the government may be thinking about introducing an SFDR parallel in the UK, going beyond the new climate risk disclosure regimes for pension schemes and other financial institutions.

Separately, the UK has set up a Green Technical Advisory Group to provide independent advice to the government on the development of a UK taxonomy.   

How the UK’s answer to SFDR could look like

The starting point is that the SFDR is primarily a disclosure-based regime, which aims to enhance transparency around sustainable investment practices.

In other words, we might expect the new UK legislation to let trustees develop their own policies and processes using a set of broad statutory principles, and then make public statements describing those policies and how far they are put into practice.

These public disclosures would be scrutinised by members, activists and others — potentially bringing stakeholder pressure to bear on boards that are perceived as not doing ‘enough’.

Trustees who are grappling with implementation statements and the new climate change disclosures will already be familiar with these dynamics.

Second, although the government’s policy paper refers to climate and environmental disclosures, the new legislation could potentially be broader than this.

The EU SFDR is not limited to climate risk: it covers the full range of sustainability (environmental, social and governance) issues and impacts. 

Under the EU SFDR, there are requirements for in-scope financial institutions to:

• Identify and assess sustainability risk, and to develop and publish written policies about how these are integrated into investment decision-making, potentially including descriptions of how sustainability risks might affect investment performance. This would involve collecting and reporting on a variety of ESG data.

• For some larger institutions, assess and disclose ‘principal adverse impacts’ (sometimes called ‘negative externalities’) of investment decisions and how these are monitored, managed and engaged with (so, considering potential negative impacts of investments upon the wider world based on a range of issues including ESG, employee matters, human rights, and bribery and corruption).  

• Make further pre-contractual and periodic quantitative and qualitative disclosures that are designed to combat greenwashing, where a particular product promotes ‘E’ or ‘S’ characteristics.

• Provide sustainability information to investors or stakeholders before they enter into a relationship with the provider.

If taxonomy regulation equivalent requirements are also introduced, then further qualitative and quantitative disclosures could also be required; for example, the percentage of investments that are taxonomy-aligned.

Requirements could be adapted to pensions market

Of course, we have no details of the UK proposals yet. At first glance, some of the requirements above might not seem a natural fit for the traditional pension trustee-member relationship, but it does seem possible in theory that they could be adapted to the pensions context.

A key trustee concern about this will be duplication of obligations. It is highly likely that some pension schemes will be in scope for both this new regime and the climate change regulations.

For instance, a scheme may collect scope 1, 2 and 3 greenhouse gas emissions data for the purposes of climate change disclosures, and then also use the data as part of disclosing principal adverse impacts under the UK SFDR.

Clearly, there is a risk that the overlap between the two regimes could be imprecise, possibly resulting in multiple underlapping and overlapping disclosures. 

In our consultation response on the climate change regulations, we encouraged the government to look for ways to consolidate the numerous sources of pensions ESG law into a single more cohesive legal regime. It seems to us that the potential UK SFDR could provide an opportunity.

We hope to learn more about the proposed UK regime in November, around the time of COP26. It will be interesting to see if any of our predictions are borne out.

In the meantime, this is definitely an area that the pensions industry will continue to watch with interest.

Andy Lewis is a partner in the pensions sector group at Travers Smith