Pensions investing and ESG: Is it fair to ask pension schemes to sort out the world's problems?

By Gareth Jones

The requirements for pension schemes to incorporate ESG and climate change reporting into their investment and stewardship activities is good for the planet, good for the government and good for fund managers – but adds further pressure on pension scheme trustees. That was the broad conclusion of the discussion at SEC Newgate’s latest pensions event attended by representatives from the pensions and asset management industries. With key insights provided by speakers Gareth Davies MP (Conservative MP for Grantham and Stamford), Hope William-Smith (News Editor of Professional Pensions) and Alistair Byrne (Head of Retirement Strategy, State Street Global Advisors) considered and debated the measures that needed to be taken by pension trustees and fund managers to incorporate these new standards.

The past few years have seen the emergence of ESG and green finance as central issues for investors and financial markets. This process has been driven by policymakers, markets, companies and investors. Many in government see this change as the first step to delivering some fundamental changes in our economy, whether that is on delivering on net-zero pledges to combat climate change or addressing other social problems through purpose-led investing.

Pension funds have been targeted by policymakers as one of the first parts of the economy that will need to deliver on these changes through their investment and stewardship approaches, which is why they have been targeted through new rules on ESG standards and climate reporting (eg on new TCFD requirements). The size and scale of pension funds means that they can make a significant impact on the markets and companies they invest in and encourage other investors (institutional and retail) to follow in their footsteps. However, much of the burden of new government regulations fall to pension scheme trustees – and many trustees are still not certain as to whether these rules can be incorporated, while maintaining their fiduciary duties to deliver the best returns for their scheme members.

Hope William-Smith noted, from speaking to pension trustees on a daily basis, that their off-the-record reaction to new government rules is very different to their public statements. She said that many trustees are feeling the pressure from the new rules and – as legal owners of pension scheme assets and personally liable for anything that may go wrong – are afraid of the consequences of these additional responsibilities. She added that there is general feeling that their new role is not something they originally signed up for.

Gareth Davies MP, drawing on his experience and perspective as a member of parliament and a former fund executive, said that incorporating ESG and climate risk standards was a significant opportunity for the UK to become a world leader in an emerging form of finance. He added that he didn’t believe this was an “either/or” issue for pension scheme trustees in terms of fulfilling their fiduciary duties to members, stressing that the two issues were aligned and ESG and climate standards were an important risk management tool for trustees (for instance, not recognising or addressing climate change risks in their investment decisions would ultimately have a negative impact on the scheme and its members).

Alistair Byrne outlined some of the practical ways pension schemes can deliver on these new requirements. In terms of ESG investment approaches, Alistair said this could be done though excluding worst performers, adopting a thematic approach (investing in key sectors) or taking a more proactive impact investing approach. In terms of stewardship, pension schemes can take an active role in company voting, where they can influence company policies on environmental and social issues (such as diversity or labour practices). There was some discussion and debate on the merits of these approaches – with some feeling that exclusion was a poor method of addressing environmental and social issues, given that it hands responsibility to other investors.

One important issue that was raised was on the capability of pension schemes to deliver meaningful change on an ESG agenda while they were in the process of de-risking. Some in the industry noted that many schemes enter into a mature phase, they are less likely to hold equities in companies and more likely to hold bonds. Gareth Davies noted this point, but also observed that fixed income bonds can be a more precise instrument for impact. For instance, the UK government’s new green gilt provides a degree of clarity on where investment is targeted.  

Overall, it was noted that pension trustees play an incredibly important role in delivering this agenda and ensuring that the large sums of money are being invested in acceptable way. It was recognised that these additional responsibilities place extra burdens on them – although it was recognised that pension trustees are in position they are in, as they are people who have shown that they can handle these responsibilities.