Regulator Publishes Insight on Stewardship and Handling Systemic Threats in Pension Management
The Financial Regulator has released a blog outlining its expectations for trustees regarding systemic risk management and investment strategies. The guidance, which focuses on the integration of environmental, social, and governance (ESG) factors and emerging risks, stresses the importance of a holistic approach to risk management.
According to the Regulator, trustees must shift from siloed risk management to comprehensive, enterprise-wide frameworks that incorporate financial, ESG, operational, and emerging risks cohesively. This change is driven by the increasing complexity and global divergence of regulatory standards, such as Basel III and ESG mandates, which are being implemented in various jurisdictions.
In light of this, the Regulator is advocating for trustees to make decisions that are long-term, well-supported by evidence, and open to scrutiny. Trustees are also expected to understand and manage financially material risks, such as climate change and nature loss. The Regulator considers strong investment governance to be crucial, especially in complex areas like ESG and private markets.
The Regulator's guidance emphasizes the importance of managing systemic risk as a "core part" of effective trusteeship. To achieve this, firms are expected to continually self-assess their recovery and resolvability capabilities, including testing response to ESG-related scenarios, to ensure readiness to react to systemic shocks related to both financial and ESG factors.
The Regulator also recommends the use of the Taskforce on Nature-related Financial Disclosures (TNFD) framework and encourages the deployment of AI and advanced analytics to improve risk detection and management. However, the Regulator cautions against model risk and emphasizes the need for transparency.
In addition, the Regulator has consolidated its ESG guidance and updated its Trustee Toolkit to reflect the latest developments in systemic risk management. The Regulator has also joined the UN Global Compact to strengthen its own capabilities.
The Regulator's latest guidance for 2025 depicts systemic risk management as a dynamic, multi-dimensional discipline that now explicitly includes climate change and nature loss as material financial risks. This requires regulators and firms to adopt integrated, data-driven, and forward-looking frameworks that bridge traditional financial risk with environmental and governance dimensions, aligning recovery capabilities and resilience planning with evolving global standards and market realities.
Trustees are urged to ensure their investment strategies are resilient, well-informed, and focused on long-term outcomes. The Regulator's guidance underscores the need for trustees to understand and manage risks in areas like climate change and nature loss, as these factors can pose significant threats to long-term investment success.
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