ESG Overload 

UK asset owners are feeling the squeeze from sustainability reporting, but they are working on ways to ease the pinch.  

Last month sustainable investment stalwart Amanda Young, Chief Sustainability Officer at asset manager Abrdn, warned that ESG rules and reporting were pushing talent out of the industry.  

“We’re on our knees at the moment,” she said. “I’m exhausted, I’m fed up, and I feel like I’ve become a compliance function.” 

David Russell, who until June of this year was head of responsible investment at UK pensions giant Universities Superannuation Scheme (USS), tells ESG Investor that UK asset owners are feeling the same way with reporting requirements and expectations seeing a sharp uptick over the last four years. 

The first time asset owners were expected to report on responsible investment was back in 2007 as part of the UN-convened Principles for Responsible Investment’s (PRI) reporting assessment framework, Russell explains. This was followed in 2010 by high level reporting for the Financial Reporting Council’s (FRC) original Stewardship Code. Despite both being voluntary, they quickly became industry norms, along with a minority of asset owners starting to do voluntary Task Force on Climate-related Financial Disclosures (TCFD) reporting in 2019/20.  

Then in 2020, things began to change, notes Russell. “The PRI’s Reporting and Assessment process became incredibly complex to complete in 2020. In the UK this coincided with an updating of Stewardship Code reporting requirements and TCFD reporting for pension funds becoming mandatory.”

On top of this, in addition to the inclusion of ESG reporting in pension fund’s annual report and accounts, an Implementation Statement is now required setting out how a pension scheme’s Statement of Investment Principles (SIP), which typically include positions on ESG and climate change, is being put into effect. 

“A lot of pension funds in the UK struggled with all this reporting,” he says. “UK pension funds are at the sharp point of ESG and climate related reporting globally, and we’ve got to the point where there’s a lot of both ‘voluntary’ and mandatory reporting that, to be blunt, most asset owners are not set up or resourced to do.” 

Disclosure by pension funds on how they are addressing these issues is obviously important, he adds, but we have reached the point where the reporting burden is significant and the cost, which is borne by members, is too high. 

Michael Marshall, Head of Sustainable Ownership at Railpen, agrees that the increase in multiple sustainability reporting requirements, which often have overlap, is an issue for UK asset owners.  

“In fairness, the requirements come from different bodies with distinct objectives, so from the PRI to the FRC and the DWP (the UK’s Department of Work and Pensions) they are under no formal obligation to consider the aggregate reporting burden, but we would like to encourage more of this.” 

Fundamental disconnect 

Mandatory TCFD reporting particularly has annoyed and frustrated many pension funds – especially as some believe it was introduced partly to satisfy the politics of the time.  

The UK hosted COP26 in 2021 and, therefore, wanted to be viewed as a climate leader. “It was easier to push on pension funds’ door than on asset managers’ door,” one organisation told ESG Investor.    

Since 2021, large pension funds have been required to publish a TCFD report annually – the first financial organisations in the UK to have this requirement. “The impact assessment for TCFD reporting requirements is a bit of a joke in pension scheme circles,” according to one pension scheme executive.  

“The assumption is that you can get your ESG data very cheaply, that scenario analysis doesn’t cost very much and that trustees can read and understand very long and detailed requirements in three hours. But I can tell you it takes much more time and money to do that.”  

One pension fund says the impact assessment assumed climate metrics could be obtained on an annual subscription for £2,500 when it currently pays around £30,000.  

To make matters worse, the UK’s pension fund TCFD regulation has around 180 individual questions that large asset owners are expected to answer, notes Russell. “It requires input from all sorts of teams across the organisations,” he continues. “It covers risk management, scenario analysis, how you are addressing climate change, and it has to be signed off at board level.” 

The DWP is set to review TCFD rules this year and decide whether to extend to schemes of £1 billion or less. The DWP didn’t respond to inquiries from ESG Investor on when this is expected to be announced or provide details of the impact assessment it did on TCFD regulations. 

Earlier this month, Claire Jones, Partner and Head of Responsible Investment at consultancy LCP, wrote a blog saying TCFD reporting needs to evolve. According to Jones, while climate change is now a much greater focus for large pension schemes and master trusts, “trustees seem to have made relatively few changes to the way they are actually managing their schemes and so there may not have been much reduction in climate-related risks to members’ benefits”.  

Mike Clark, Founder at consultancy Ario Advisory, agrees, noting that reporting is not risk management. He also suggests there is scope for TCFD reporting to evolve to transition plans, which in his view would be a “more powerful driver” of tangible change in a pension fund’s approach to risk management.  

Ben Wilmot, Co-founder at consultancy Canbury, sees artificial intelligence (AI) as a technology with the potential to drive more streamlined reporting. He also has concerns about the tangible impact of the sheer volume of reporting.  

“Asset owners face a range of implementation challenges, including black box data, a lack of dedicated, senior advisory, fragmented services, and firefighting to meet disclosure requirements,” he says.  

“Rather than focusing on implementation, sustainability reporting often appears disconnected from the fundamentals of investing.” 

Equivalency project 

Asset owners like Railpen and USS are looking to convene bodies to try and tackle the reporting burden issue.  

“The fact that there’s more disclosure and a greater level of interest from regulators is a sign of health for the responsible investment agenda,” says Marshall. “If there was nothing I’d be worried, but there are ways in which we can ESG reporting smarter.”   

Marshall sits on the engagement group of the Occupational Pension Stewardship Council, created by the DWP as a forum for sharing experience and best practice. He leads a workstream bringing together UK regulators such as the DWP, FRC, FCA and The Pensions Regulator to align on the policy outlook. 

On the suggestion of UK asset owners, the PRI is now doing a proof-of-concept study into “equivalency”, to determine potential equivalency between the PRI reporting framework and the UK Stewardship Code. Enabling reporting organisations to meet two equivalent standards with the same report would create a significant reduction in the reporting burden. 

This week, the PRI proposed “significantly reducing” members’ mandatory reporting and avoiding duplication with other reporting requirements. It is also exploring choosing when organisations report to it, with Marshall noting that another key issue with sustainability reporting is that deadlines tend to land in the first half of the year, during a time when “teams have to do three to four huge reports, overwork, and not get much else done”.  

“The hundreds of pages of reporting measured against number of downloads is quite disappointing too,” he adds.  

Railpen and USS are two of the largest pension funds in the UK; smaller sized pension funds will likely be even more challenged by the reporting burden. Karen Shackleton, Chair and Founder at Pensions for Purpose, says organisations are collaborating in response.  

“Collaborative organisations such as Local Authority Pension Fund Forum (LAPFF) ease the reporting burden on pension funds’ internal teams,” she says, adding that collaborations with external consultancies and service providers are “extremely common”, offering tailored solutions to help asset owners meet their reporting obligations.  

“Pensions for Purpose also offers forums that asset owners can attend free of charge.”  

Shackleton adds that Pensions for Purpose advocates for capacity building within asset owner organisations. This involves upskilling current staff as a priority but also potentially working with specialists who can focus on key areas.  

“Tools such as third-party reporting software or compliance services are also being explored to help asset owners streamline their reporting process,” she says, noting that many asset owners now recognise they need to invest in stewardship by growing their internal teams.   

Hilkka Komulainen, Head of Responsible Investment at Aegon UK, agrees with others in this article that there are serious unintended consequences from the volume of sustainability reporting. However, she notes that it has also put sustainability firmly on the agenda of pension trustees which is a “clear benefit”.  

According to Komulainen, sustainability reporting has legitimised investment into ESG resources and data, but she adds that there is a “mismatch” with regards to the emphasis on asset owners who are typically less well-resourced compared to asset managers and corporates.  

TCFD especially comes under criticism in this respect, with one asset owner noting that the TCFD in 2017 said that asset owners needed to take a leading role in the fight against climate change and the demand for better data due to their position at the top of the value chain.  

An asset owner notes that this logic has persisted since then and become explicit through regulation, with UK pension funds complying with TCFD reporting before asset managers and companies. 

“It is a bit naïve because we don’t have full bargaining power over everyone else,” they say.  

“It’s not true that we can just bark and everyone else will listen to us.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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