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Investment to-do list: Governance steps for trustees in relation to ”backward-looking” reports

  • United Kingdom
  • Pensions



With the myriad of recent changes in the investment space for occupational pension schemes, it can be tricky for trustees to keep up to speed with developments and pinpoint the action they need to take.

In this speedbrief, we set out a reminder of action points for trustees to keep up to speed with evolving legal and regulatory requirements and ensure they can provide meaningful “backward-looking” investment reports.

1. Implementation statements

The DWP has recently published statutory guidance setting out its expectations of trustees when reporting stewardship activities in their implementation statement. Trustees must have regard to statutory guidance - please see our recent speedbrief for further detail.

Whilst the statutory guidance will not apply until next year’s implementation statement (i.e. it is “live” from 1 October 2022 and applies to scheme years ending on or after 1 October 2022), trustees should remember that implementation statements are backward-looking and need to record the stewardship and engagement activities carried out during the previous year (and for DC schemes, trustees need to report wider adherence to investment policies in the statement of investment principles).

This means that trustees should take action now to embed the statutory guidance into their governance, stewardship and reporting processes so that they can fully comply with the guidance next year.

For example:

  • The statutory guidance says trustees should explain in the implementation statement whether voting undertaken on their behalf reflects their voting policy (or, if they use their asset manager’s voting policy, they should summarise how it reflects the trustees’ stewardship priorities). Therefore, trustees will need to set clear expectations of their asset managers now to ensure they carry out voting and engagement activity in line with trustees’ investment beliefs and stewardship priorities (which includes trustees’ view of what constitutes a “most significant vote”). 
  • The statutory guidance also says trustees should explain why they consider a vote is significant, what the vote was, and why they or their investment manager (on their behalf) voted in the way they did. To be able to report with this level of granularity next year, trustees need to take ownership for voting carried out on their behalf, challenge their managers’ engagement and voting practices and consider setting “expression of wish” forms. Expression of wish forms are a form of communication, similar to sharing a policy or client preference, which set out what trustees expect their investment managers to consider. They are a useful tool, particularly for trustees investing through unit-linked funds without direct voting rights.

Trustees need to think about stewardship now, regardless of the date of their next implementation statement. They need to make sure that they and their asset managers are clear about their stewardship priorities and the information they need to satisfy the reporting requirements in the statutory guidance. 

2. Statement of investment principles

The DWP has also published non-statutory guidance for trustees in relation to disclosing stewardship and engagement policies in their statement of investment principles (SIPs). The non-statutory guidance is “live” already and has applied from 17 June 2022.

Although the guidance is non-statutory and trustees are not obliged to take it into account, trustees of DC schemes in particular should remember that if they have a SIP which reflects best practice and regulatory expectations, it will make it easier to report in their implementation statement how they have complied with their SIP.

3. TCFD reporting

Most trustees of large pension schemes in the first wave of Taskforce on Climate-related Financial Disclosures (TCFD) compliance have either published their first mandatory TCFD report or are in the final stages of production. 

We have advised several trustees on drafting their reports - here are our 5 tips for trustees now and going forward:

  • Governance: ensure there is a clear governance link between trustees and the activities of their service providers in relation to climate risk and opportunity (CRRO) - trustees need to report on how they monitor, review and challenge the activities of their service providers rather than simply reporting on what service providers are doing.
  • Strategy: climate risk will depend on the nature of investments (e.g. asset class and geography), proportion of investments (i.e. percentage of those investments in the portfolio) and the length of investments. When identifying climate risk, trustees should show how this risk varies between investments in light of these differentiators.
  • Risk management: management of CRRO should be proportionate and relevant to trustees’ wider risk management. Trustees should identify and contextualise climate risk to the wider risks of the scheme and refer to the risk register and other risk management tools to show how they assess the materiality of these risks.
  • Metrics: when obtaining data, trustees should ask their service providers whether data is reported, verified, estimated or unavailable and the proportion of data that reflects these categories. This will determine the extent of trustees’ reliance on existing data and future steps they need to take. Currently, there is a limited number of climate data providers in the market and we are seeing trustees encounter the same coverage issues across their portfolio and limitations to data quality. Trustees should be alive to these issues and continue to seek improvements by setting objectives, deliverables and expectations of their service providers in order to improve quality of data and future reporting.
  • Principles: TCFD compliance and activity is a cyclical process. This means that trustees need to analyse the results of their metrics and scenario analysis and apply the results to their strategic and day-to day investment decisions. Calculation of metrics and scenario analysis is not a means to an end but a way of informing and influencing investment and stewardship activity.

For next year, trustees (in the first and second wave of compliance) will need to report a portfolio alignment metric as well as an additional climate metric. Trustees should take steps now to be able to report four metrics next year and ask their service providers which climate metrics are available and whether they align with the DWP’s recommended metrics in its revised statutory guidance - please see our recent speedbrief for further detail.

4. ESG policies

As part of the non-statutory guidance on the SIP, the DWP encourages trustees (where it is practical to do so) to keep under review non-financial factors that may not immediately present as financially material but have the potential to become so, particularly for schemes with a long-term horizon. This reflects the evolving nature of ESG and the relevance of emerging concepts such as the “Just Transition”, which look at the social and societal impacts of the climate transition.

Trustees should consider how they take social factors into account as part of the statutory requirement to have a policy on financially material ESG factors in their SIP. The Government is concerned that social factors are not considered enough and recently announced in response to a call for evidence that social factors can be financially material and should be taken into account by trustees. It is setting up a taskforce to look at how they can access better information to assess social risks and opportunities.

In the meantime, trustees should:

  • Actively consider which social risks and opportunities might be financially material to the performance of the scheme
  • Develop a policy on their approach to social issues which includes voting and engagement. DWP says: “Trustees are encouraged, bearing in mind the scheme’s size, type, and resources, to undertake stewardship activities in respect of specific material social issues”
  • Try to be aware of the links between climate change and social factors because it can help them manage financially material risks and opportunities in an effective way
  • In a DB scheme, ensure that they understand the impact of social risks on employer covenant. 

What next?

Trustees should engage with their service providers (including investment managers and consultants) on all these issues sooner rather than later. They should be clear on their stewardship and investment priorities and how they expect service providers to implement them, so that they can provide meaningful public disclosures of a good standard. 

Finally, this is an area where developments are coming thick and fast so trustees should watch out for any further developments.  

You may also be interested in our podcast: TCFD and beyond: what’s on the horizon for trustees of larger schemes?

  1. Taskforce on Climate-related Financial Disclosures (TCFD)”