ESG - time for trustees to take control

Public concerns over environmental, social and governance (ESG) issues grow stronger and louder almost daily. This is a very overt factor which has helped drive a great deal of pensions debate around ESG matters.

From 1 October 2019 the Statement of Investment Principles (SIP) must include how trustees take ESG considerations into account. Further, from 1 October 2020 trustees must report on how they will comply with sustainable investing, ethical issues and stewardship.

We, as Trustees, own the scheme assets. We have an obligation to provide effective stewardship and act responsibly on behalf of our members. This covers voting at company meetings and engagement with company management when required. We can influence corporate behaviours by investing in businesses with high ESG standards and disinvesting in those with low ESG ratings. This is likely to mean we will need a close relationship with investment consultants who will help us with this work and with investment managers who are moving the money around on our behalf.

This is all well and good but I have some concerns.

Firstly, too many trustees are not yet fully focussed on ESG. Some sceptical voices say, ‘we can’t do anything about climate change’, ‘we don’t really know what members want’, ‘we have passive investments so ESG doesn’t apply’ or ‘we are one of many investors in a pooled fund so can’t influence the manager’. Younger generations seem to worry more about ESG but trustees tend to be older. Are trustees out of touch with ESG just because of their demographics?

Secondly, the support trustees receive from their investment consultants on ESG is generally poor. I am fortunate to work on multiple schemes and see what different trustee boards are doing and what their advisers are saying. I have heard many investment consultants telling trustees to add vague words to the SIP so they are compliant with the new requirements. These are wishy washy statements at best, meaningless at worst, and make investment consultants appear weak on ESG. It is ironic that trustees pay investment consultants handsomely, but it sometimes feels like the blind leading the blind.

Some investment managers are making positive steps on ESG and are very good at publicising this. Of course, they are aiming to attract the attention of the consultants and trustees, so more money is invested with them. This means more fees for them.

For me, the balance is wrong. As asset owners trustees should tell the investment managers what to deliver on ESG and then measure investment managers’ performance in the normal way. Investment consultants should be helping trustees assess the ESG performance of the investment managers. If this highlights poor ESG performance then trustees should move their money away. As a result, investment decisions on ESG are treated in exactly the same way as investment return performance decisions.

Trustees need to appreciate that ESG is here to stay. The ESG investment process is likely to change materially in the next few years. Trustees need to take back control and hold their investment consultants and investment managers to account on ESG.