6 months and counting… what sort of responsible investor are you going to be?
01 Apr 2019
We seem to be getting used to countdowns but, unlike Brexit, this one isn’t going to change.
Last year, the Government updated the Regulations for DB and DC pension schemes, requiring trustees to reconsider their approach to responsible investment. By 1 October 2019, just six months from now, trustees need to have updated their Statement of Investment Principles to include their policy on:
- How they take account of ‘financially material considerations’ which includes, but is not limited, to ESG factors. Climate change is an issue singled out for attention;
- Their approach to stewardship activities for the assets held, including how they engage with investment managers; and
- The extent to which any non-financial matters are taken into account. This includes the views of members and beneficiaries although there is no obligation for trustees to take such matters into account.
In addition, DC trustees also need to publish their SIP online and, from 1 October 2020, they need to annually report on how they’ve complied with their policies.
Whilst trustees can simply rewrite their policy to meet the new Regulations, it’s clear that many need to up their game to comply with its intent. The goal of the regulatory change is to encourage trustees to change their behaviours and to explore how they can become more responsible investors. This doesn’t mean ripping up the entirety of an investment strategy, but rather recognising that change can be accomplished through a series of small steps. This can include actions such as building knowledge through training sessions, ensuring that when material changes to investment arrangements are made, questions are asked about the extent to which ESG issues are relevant and providing greater challenge to those, such as investment managers, who act on your behalf.
It's no longer satisfactory to simply state that responsibility is delegated to investment managers. Nor should it be acceptable for trustees to claim that, because strategies are implemented through pooled funds, they have no ability to act. Trustees need to remember to whom their managers are accountable, and what the fees being paid actually cover. For example, where trustees employ an equity manager, they are likely to be paying that manager to undertake some form of stewardship. Managers can therefore be questioned on their actions, including how they vote and engage. By holding managers to account, trustees can influence behaviours.
How to deal with managers is just one of many issues that trustees will have to grapple with as they work towards finalising their policy statements. But although there is a deadline, this represents the start of the hard work, not the end. Policies are a statement of intent and, going forward, trustees should be able to demonstrate they are putting policies into practice. This is particularly true for the trustees of DC schemes who have an obligation to publish an annual report on their actions.
So if you’re still thinking about how to update your policies, you may find our guides for DB and DC schemes helpful. But perhaps a good starting point may be to pose yourselves the question, “what sort of responsible investor do we want to be?”