Pension schemes and the industry as a whole are responding to the zeitgeist of ESG (environment, social and governance) investing.
Last year the Universities Superannuation Scheme, the UK’s largest pension scheme in terms of assets, announced that by 2023 it will have divested from companies involved in tobacco production, coal mining and weapons manufacturering, where this makes up more than 25% of their revenues.
The UK Government has chosen not to impose targets on pension schemes.
It is instead hoping they can all learn from the actions of some that have set ambitious ESG investment strategies, and in particular those that have voluntarily adopted net-zero targets for their investments.
Trustees should not focus solely on the “E” in ESG. The social credentials of companies seeking investment are just as important.”
Pension schemes will need to engage much more with their asset managers, understand what net-zero really means, and be prepared to better interrogate their managers over their fund selection and how this is being monitored.
This will require trustees to be more clued up, and to perhaps have a much different investment strategy than they have had in the past.
But the effort is likely to be worth it for their scheme members.
ESG investing is proving to be very attractive to millennials – trustees may be surprised by just how many of their members fall into that bracket – and is bucking the common assumption it means lower returns.
Research by Bloomberg has shown the average ESG fund fell in value by just half the decrease registered of other funds in the S&P 500 index over the same period during the Covid-19 crisis.
All of which is good news for DC (defined contribution) fund values, and also for DB (defined benefit, or final salary) schemes that are seeking to rely less and less on the employer going forward.
Trustees should not focus solely on the “E” in ESG though. The social credentials of companies seeking investment are just as important.
Companies with solid scores in this area seem to have also performed better during the pandemic.
Members will likely expect further and better particulars from their schemes about how these scores are arrived at, and how they are shaping investment strategies.
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So how can trustees ensure managers engage positively with investee companies on their behalf?
There are some key actions trustees should take in order to exercise the right degree of influence and accountability among their fund managers:
Awareness
Trustees should educate themselves about the “S” and “G” in ESG, not just the “E”, and ask managers and other advisers to provide training on how to interpret information.
They should also ask what sources are being used to asset the ESG credentials of funds – especially social factors, such as labour standards and diversity.
This will allow trustees to better monitor their managers, and understand and interrogate the information provided by them, and in turn, managers will be forced to engage positively with investee companies.
Accountability
Trustees should make clear what their position is in relation to ESG.
They should also make clear how they will review the performance of their managers and investments against this position – and not just use boiler-plate assurances the asset manager’s policies are consistent with their ESG goals.
Tracy Walsh is a partner in the pensions team at law firm Womble Bond Dickinson.
