How can trustees embrace ESG?

ESG principles have been with us for a number of years and many trustee boards have received training from consultants and investment managers. But how many are really comfortable with the concept of establishing and upholding meaningful ESG principles within their investment decisions? I suspect only a few.  

What exactly is ESG?

The most topical of the capitals tends to be the ‘E’ (Environmental) and certainly before the emergence of Covid-19 there was a growing global trend for us all to take environmental, and in particular climate, risks more seriously. While we could spend all of our time considering this one area, this is not the only complex issue contained within the three-letter acronym. It also covers a huge number of social (the S) and governance (the G) issues like a company’s labour practices, forced labour within the supply chain, data security, pay equality and diversity. It really is a broad challenge and one which all corners of the economy and society need to embrace if we are to succeed in making choices that lead to a better future.

Whilst the idea that we all as consumers and investors embrace ESG is appealing, governments are not convinced about how quickly that will happen and consequently there has been a move towards regulation, particularly with respect to asset owners who are acting on behalf of others.

New regulations

In the UK, this has resulted in a set of regulations which UK pension schemes need to comply with. In particular, from 1 October 2020 UK pension schemes will need to produce Implementation Statements when finalising their accounts, confirming the extent to which their investment managers have followed the agreed voting and engagement policies. Anecdotal evidence is that most Trustee Boards will struggle to capture appropriate detail on the extent to which their managers have been voting and engaging in line with the trustees’ policy aims but this will I am sure improve over time. Further regulation in the wider areas of ESG is almost inevitable, so pension schemes and in particular trustees, are going to have to figure out how to engage fully in the topic. This is unlikely to happen by spending time on training or indeed policy wording.

Here are my thoughts on ways the topic can be brought to life.

1. Ensure you have provided clear goals in the area of ESG to your investment consultant within the Objectives that you have set them
2. Ensure your investment consultant clearly explains how ESG principles are incorporated into the formulation of investment strategy and also explains how, if differing ESG beliefs are employed, what that would mean for the investment strategy and asset allocation. Use this analysis to form a clear policy preference.
3. Ensure that when appointing managers, the advising investment consultant only puts forward investment managers whose ESG beliefs are consistent with yours.
4. Ensure the investment manager clearly articulates how their ESG beliefs are incorporated into their investment process and also explains how their quarterly reporting will demonstrate this in practice.
5. Hold your investment consultant and investment managers fully to account in their periodic reporting.
6. Be prepared to adapt your position as the subject develops but essentially keep repeating steps 1 to 5.

By following the above, trustees can not only ensure they are meeting the new regulatory requirements but feel comfortable that ESG is being incorporated into how they manage their members’ money.