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U.K. pensions department calls on retirement plans to regard ESG risks as financially material

Trustees of U.K. workplace retirement plans should incorporate into investment policies material risks stemming from both traditional and non-traditional financial reporting of companies they invest in, the U.K. Department for Work and Pensions said in a proposal Monday.

The U.K. government is currently consulting the industry on a single "agreed" approach to the extent in which investment strategies of retirement plans should reflect on their participants' concerns.

In the consultation, which will lead to legislative changes, the government proposes that trustees should be required to state their evaluation of financially material considerations, including environmental, social and governance factors, and specifically climate change.

The government wants trustees to engage with companies in participants' best interests through monitoring, engagement and sponsoring or co-sponsoring shareholder resolutions, in addition to voting.

The proposal follows the U.K. government finding that trustees of occupational plans incorrectly consider ESG risks not to be financially material and do not efficiently communicate these risks to plan participants.

"We have, on the basis of the evidence we have reviewed, concluded that despite The Pensions Regulator's guidance, confusion and misapprehension over trustees' responsibilities persists. Whilst there are clearly trustees who understand the issues, are actively engaging with them and are reviewing and where necessary amending their investment strategies accordingly, good practice appears to be far from universal," the DWP said.

However, the DWP added: "We are not proposing to exclusively refer to ESG, including climate change. We do not want to be too prescriptive and industry terminologies, (which) in time, may change. Future systemic risks may also not be readily compartmentalized into one or more aspects of ESG."

The U.K. government said in the proposal that climate change considerations are separate from investments impacting air quality, water stress, soil or waste, which could also be financially material.

The consultation runs until July 16 via DWP's website.