The current reporting regime for environmental, social and governance (ESG) matters is unfit for purpose, according to HS Trustees’ Bobby Riddaway.
Riddaway, managing director at the independent trustee firm, warned at a recent industry event that the existing ESG reporting framework will not deliver the transition to a lower carbon economy, nor does it offer value to members as it involves unnecessary costs and administrative burdens.
“Pension schemes can’t solve climate change, but they can play a significant role,” Riddaway said.
However, he explained that pension schemes have been told to model climate risks using existing tools, which are not designed for ESG reporting. Asset-liability modelling, for example, was never intended to model risks such as climate, meaning that pension schemes should not be criticised for the work they have managed to do so far.
Large schemes struggle to gather meaningful data and they produce reports of varying quality. For small schemes, the situation was even more difficult, Riddaway said.
“The defined benefit [DB] implementation statement, produced on an annual basis, costs [a small scheme] anything from 10% to 25% of their annual investment budget,” he said.
Even then, these reports are often generic and lack scheme-specific data. For example, implementation statements require disclosure of achievements, many of which cannot be measured.
Riddaway proposed that there should be instead a greater focus on transition plans, particularly for smaller schemes. Transition plans would identify risks across the portfolio and demonstrate how the scheme intends to manage and mitigate them.
Regulators ‘open to suggestions’
He rejected a suggestion that the regulator would be unlikely to simplify a process that could achieve its stated aim of driving smaller DB schemes towards consolidators.
Apart from schemes having to find the money to enter consolidation, conversations he has had behind the scenes have provided positive feedback that some agencies might be open to a more pragmatic structure, he said.
“The government doesn’t have all the expertise,” said Riddaway, “and I think they would like the industry to be a lot more open with them.”
This means engaging with departments before any consultation period and entering into discussions with well-considered alternative proposals.
“Let’s pitch them something else that covers climate, that covers nature and social factors, that is better than the current disclosures and that actually gives schemes levers to pull,” he said.
Smaller schemes can improve the quality of their stewardship when they are able to take advantage of the tools they have access to, he continued, adding: “We need a suite of transition plans for large and small schemes that the regulator and the Department for Work and Pensions consider a good replacement.”
Riddaway said he hoped the industry would engage in this debate, and explained that he was planning to form a group to bring together trustees and provide them a greater voice on ESG matters.
Further reading
Invest in emerging markets to meet climate goals, schemes urged (26 September 2024)
More ESG reporting raises risk of legal challenges for trustees (12 September 2024)
What CalSTRS’ data problems mean for pension funds’ climate goals (3 May 2024)
