Trustees can be forgiven for wondering how they should go about embedding ESG principles whilst facing the challenge of an increasing legislative and compliance burden. How do they give themselves the bandwidth to deal with everything and still achieve the objective of delivering benefits to members at a time when many sponsors are seeking to ensure the future of their business rather than directing free cash towards pension funding.
As a Trustee, I believe the starting point is to be realistic as to what aspects of ESG are prioritised and accept some aspects may have to be addressed by an evolutionary approach as opposed to a wholesale revolutionary change.
ESG is a subject area flooded with scientific data and terminology, government targets, unintelligible metrics and opinions. However, to me, it is clear the standout ESG components are sustainability and climate-related. The starting point being how these translate to the trustees’ investment portfolio.
As a speaker at the recent PLSA ESG conference, it was key for me to note that “ESG has featured on trustee agendas for a number of years. It’s not new, but what we’re seeing is increased pressure to embed ESG and climate and sustainability into investment portfolios, and that pressure is coming from a range of stakeholders,” as reported by Pensions Expert.
How Might Trustees Tackle This and When?
The timeframe for ESG compliance is uncertain but smaller schemes can expect to face the disclosure obligations applying to larger schemes over time. The basic components are already there with the need to cover ESG in statements of investment principles and produce implementation statements. I believe trustees should aim to go further than simply adopting a compliance tick box approach. Taking action now will achieve the best outcomes for all stakeholders. The case for an investment portfolio underpinned by sustainable assets has to be the way forward so the sooner trustees can start that journey the better.
Trustees Have the Power
With £2.58 trillion of assets held under UK pension trusts, the trustee community has the balance of power to influence sustainability in a meaningful way. Trustees are in a position of power to influence and ensure that the pension industry delivers a tangible contribution to the targets being set by government and the expectations of wider society.
I would argue that the majority of trustee boards have relied on their investment consultants and investment managers to do the heavy lifting with regard to sustainable investments. The majority of ESG disclosures made in SIPs demonstrate ESG is very much a work in progress.
So how might a trustee board go about tackling this significant challenge? My suggestions are:
- Start with identifying a set of investment beliefs
- Benchmark the current position with a view to adopting a revised approach to investment
- Embed this into the investment portfolio.
I would urge trustees to sign-up for the programme being driven forward by Accounting for Sustainability (A4S) which is a programme of the Prince of Wales Charitable Foundation. The A4S website contains a number of helpful tools that can support trustees in benchmarking where they are with a view to developing a plan for the future.
The A4S toolkit plus the available metrics for measuring the impact of sustainable investing represent the building blocks to achieve meaningful outcomes. Few trustee boards have the capacity to adopt a bottom-up approach so going back to first principles to set a strategy and then delegate the implementation of that strategy is where a Trustee Board can bring real influence to bear on the investment industry.
Setting targets and measuring achievement by demanding clarity will be the driver for the investment community to bring solutions to the table that will generate improvements. The balance of power sits with trustees and through effective governance and delegation trustees can make a meaningful difference. Trustees taking pre-emptive action ahead of obligations placed on them by regulation has to be the right thing.
Fundamentally, there is simply insufficient time for an evolutionary approach to ESG. The right strategic approach will achieve the optimal risk/reward balance that trustees are seeking, ensure reputational risk is managed, and address the interests of all of us, not just the pension industry.
Sustainability is not a new topic but a renewed energy needs to be put behind trustee governance to make a difference.
Afterall, the planet really can’t wait.
Roger Cooper is Head of Trusteeship at Pi Partnership Group and is an Accredited Professional Trustee. He has over 30 years’ experience in the pension industry and now acts as Chair to a number of pension schemes including defined benefit and defined contribution arrangements. A regular speaker at pension events Roger recently participated in the PLSA ESG conference and is leading Pi’s trusteeship response to embedding ESG principles in a pragmatic and effective manner.