ESG as part of investment strategies

Environmental, Social and Governance (ESG) considerations have become central to pension scheme investment strategies. As major institutional investors, pension schemes are at the forefront of an evolving regulatory and stakeholder landscape that demands both compliance and meaningful action.  

The ESG imperative for pension schemes 

ESG is no longer a ‘nice to have’ for schemes’ investment considerations. As the Pensions Regulator (TPR) has recently stated, awareness of and managing systemic risks is now a core part of effective trusteeship. It's a statutory requirement for most, with schemes under obligations from a raft of legislative requirements and guidance. It's also a business imperative. ESG factors carry both risk and opportunities when investing scheme assets, and can directly impact employer covenant. Trustees should treat ESG as a central part of investment decision-making. Further it remains a hot topic with household-name companies and schemes facing public scrutiny, corporate action and even litigation, including from member action groups, over how seriously they take ESG concerns. It highlights growing recognition of the wider economic and social role pension funds play.  

The regulatory landscape  

Currently, pension scheme trustees are required to understand and act on financially material factors including ESG considerations. Trustees of the largest schemes are also subject to governance and reporting requirements set out in regulations under the Pension Schemes Act 2021 and in line with Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations: schemes in scope must take steps to identify, assess and manage climate-related risks and opportunities and report publicly on what they have done. Since 2022, this has included disclosures related to their investment portfolio’s alignment with the Paris Agreement goal. 

In addition, relevant schemes’ statement of investment principles (SIP) must cover the trustees' policies on financially material ESG considerations (and the extent to which non-financial matters (such as the views of members and beneficiaries) are considered in investment decisions). Trustees must also prepare a publicly available ‘implementation statement’ covering their stewardship (engagement and voting on matters affecting long-term value.) 

TPR’s 2023 Market oversight Review of trustee compliance with ESG duties found that many schemes were only demonstrating minimum compliance and made it clear that it expected more. Trustees must move beyond theory and ensure that risk reporting and policy convert into meaningful and practical actions.  

TPR’s updated General Code of practice also increases the emphasis on ESG, noting that understanding ESG matters relating to scheme investments is a vital component of an effective system of governance. The Code has new and extended sections on stewardship and climate change, and is clear that these should be considered across all schemes, not just those subject to legislative requirements. While current regulations focus primarily on climate-related risks, TPR's guidance advises schemes to ensure they take a broader view of ESG – read more about this in our recent Insight.  

What's new? 

Legal, regulatory and industry thinking in the area continues to develop, and recent developments from the Government and regulators refine and progress requirements. 

The ESG landscape for pension schemes will continue to rapidly evolve with changes that will shape the regulatory environment, and international pressure and potential changes in emphasis. 

• Embed ESG in decision-making: ESG integration is fundamental to effective pension scheme governance and investment management, not a compliance exercise. Trustees must ensure their policies are implemented in practice, with clear oversight and accountability.
• Stay ahead of change: Trustees should monitor regulatory developments and prepare for expanded requirements. Engaging with TPR’s recommendations and industry guidance is essential.
• Challenge advisers and managers: Trustees must have the knowledge, skills and advice to oversee ESG risks effectively. They should challenge advisers and asset managers, ensuring they have the right information to make informed decisions. 
• Engage with stakeholders: Trustees should communicate their approach to ESG clearly to members and stakeholders, demonstrating active stewardship and responsiveness to evolving expectations.
• Prepare for the future: The ESG landscape will continue to evolve, with increasing pressure and potential changes in emphasis. Trustees must be proactive, anticipating future requirements and positioning their schemes for long-term success.  

The strategic imperative 

The message is clear: pension schemes must be active, engaged owners of capital. ESG is now a strategic priority for pension schemes. Trustees who embrace this shift, moving beyond minimum compliance to meaningful action, will be best positioned to deliver long-term value for their members and meet the expectations of regulators, members and society.

Next steps

To discuss the requirements for your scheme, and the steps you can take to strengthen scheme governance up to speed, speak to TLT’s Pensions Team.  

You can learn more about how we can help you with your ESG goals on our ESG services page.

To discover the other articles in our ESG in the boardroom series, covering topics including supply chains, reporting and regulation, and corporate governance, visit our ESG in the boardroom In Focus page. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2025. Specific advice should be sought for specific cases. For more information see our terms and conditions.