ESG: Legal duties the main reason for adoption

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Legal requirements are the main driver for considering ESG factors in trustee decision making, a new survey has found, but three-quarters of respondents also named risk management as a reason. 
 
The UK introduced legislation last year which means authorised schemes and those with at least £1bn in assets have to consider climate risk and publicly report on it, with plans to expand this to smaller schemes. The law follows other regulatory measures such as including ESG in the statement of investment principles and producing an implementation statement, but it marks a step change nonetheless, going further than previous requirements. 
 
While the UK has committed to be net zero by 2050 and the effects of climate change are increasingly being felt, the survey by Barnett Waddingham shows the decisions of pension trustees and other asset owners are still heavily influenced by legal requirements, as 91% cite ‘responding to legislation’ as the reason for considering ESG.  
 
However, risk management is another factor, with 77% naming this as a driver for integrating ESG. On the other hand, ‘Demand from members and policyholders’ was much less influential, cited by only 28% of respondents. 

More regulations expected

 
‘New regulations’ was named by many (42%) as a reason to make a significant shift in investments, second only to ‘recommendations of their advisers’ with 48%. 

“The fact that regulation is the key driver of ESG appetite poses the question of what regulation we need to effectively encourage the economic transition away from reliance on fossil fuels,” said Amanda Latham, head of policy at Barnett Waddingham. 
 
She urged regulators to take note of these results in trying to get investors to factor in the risks and opportunities stemming from climate change. “It could be argued COP was a missed opportunity to make significant changes,” she said. 
 
Latham said she expects to see more regulation in coming years, including disclosures on biodiversity and broader sustainability like inequality and social impacts. 
 
This could be a steep learning curve for some; the survey found that 34% were just getting started on ESG investing, while 13% of investors stated they were taking a minimum compliance approach. 
 
Currently climate change is the most important ESG theme for 87% of respondents, followed by biodiversity and ecology at 49% and transitioning to a low carbon economy at 47%. Social themes featured lower down, including gender diversity (27%), multicultural diversity (25%) and pay equality (22%). 

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