Why Trustees Need a Responsible Investment Officer

The pension industry is not doing enough when it comes to Environmental, Social and Governance (ESG) issues! The recent Society of Pension Professionals’ survey of its membership showed that only 2% of respondents have seen material changes to their clients’ portfolios while 38% say their clients will take a tick box approach to ESG requirements. Trustees need to do more!

I could try the financial argument to convince you of this:

• You pay your investment consultant to support you with ESG matters but sometimes end up with vague statements designed to convince you that ESG is already a key part of the investment process.
• A lot of ESG risks will be financially material in the long term, therefore, it is your fiduciary duty to consider these risks.
• You can view ESG issues as investment opportunities for your fund.

However, while these are valid points, there is a much more important argument to consider.

It’s the right thing to do.

The pension industry controls a significant proportion of all invested assets and with that comes a huge amount of power to bring about change. Trustees are wasting their power by simply doing the minimum.

I believe it is not just ESG we need to consider but also climate change. The Paris Climate Agreement was adopted in December 2015 and aims to hold the increase of global temperatures to “well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C.”

If we are to meet the terms of the Paris Agreement, we need to make big changes now! If you aren’t convinced that these risks are real just look to Australia, California, Venice. Climate change is a risk multiplier exacerbating existing issues with energy, resource and food security and increasing the frequency and intensity of extreme weather events. This is made worse by the multidecadal lag between carbon dioxide emitted today and its full impact, meaning that climate-related risk will grow over time. And all of our pension schemes are exposed to climate risk. 

We have had a 1 °C increase in temperature so far compared with pre-industrial times. So, even with the Paris Agreement target of 2 °C our pension scheme assets will be exposed to significant risks. Think of the consequences if we have 3 °C …

This is only set to get worse if we don’t make changes now.

Trustee firms like Dalriada can start to take ownership of these issues and seek to implement changes across the industry. I have been appointed as Dalriada’s Responsible Investment Officer to drive these changes for our pension schemes. We are building the expertise in house to help manage the climate risks affecting the retirement of each of our members. We plan to demand more from our investment managers and investment consultants to help us achieve this.

Investment managers and investment consultants aren’t the only ones who should have an appointed Responsible Investment Officer. If more trustees appoint a dedicated leader in this area, we can empower the industry to make the changes we need!

It’s the right thing to do.

By Clar Christie, Responsible Investment Officer