Spreading like wildfire….
08 Jan 2020
I’ve watched in horror recently, as I’m sure you have too, the wildfires that have been engulfing Australia. The destruction that’s been caused to life, the animal population and property has been devasting. Wildfires in Australia are not new – my dad was recalling recently a trip he made many years ago to the Antipodes where he witnessed similar scenes. But previous fires have been much less extreme than those of today.
Let’s not kid ourselves. Climate change is real. And it’s not just a risk to the planet; it’s increasingly being recognised as a financial risk that we, as guardians of billions of pounds of pension scheme assets, must take into account when developing our investment strategies.
But is the adoption of a positive approach to environmental, social and governance issues spreading like wildfire?
The latest research from the Society of Pension Professionals shows that 57% of respondents to their recent survey said that, although there is genuine interest in ESG, no changes to portfolios have yet been made. Nearly 40% said that the majority of their clients are treating regulatory change as a tick box exercise, solely making changes to their Statement of Investment Principles to comply with changes to Regulations which came into force in 2019. And despite requirements for DC schemes to aim to seek members’ views on the topic of ESG, of the vast majority of respondents said that less than 25% of their clients have actively consulted members on their views.
Amongst our client base at Hymans Robertson, the picture is broadly similar. While some clients have started to positively tilt their portfolios to incorporate ESG factors (indeed this has been the case for many years for a range of our public sector clients), many are still grappling to understand the financial considerations involved and continuing to debate their own views and beliefs.
Part of the reason for the perceived inertia of pension schemes in this area is the short timescale which trustees had to their update SIPs ahead of the October deadline. A trustee body or governance committee cannot simply say “yes, we think this is a good thing to do, let’s put something in place now”. There is a need for in-depth education on the topic to allow them to make informed decisions.
In some cases, there remains a need to move fiduciaries away from their historic focus on values (or ethical) investing to considering a value-based approach. Trustees still need to understand the medium to long term financial impact on companies and markets of aspects such as climate change, poor corporate governance and less than exemplary social behaviour. This is particularly pertinent within DC schemes where members will, in many cases, be invested for upwards of 30 years.
The recent survey by Share Action on the ESG approaches taken by UK Master Trusts showed a wide variety of approaches currently being taken. While NEST is testing ways to adopt a 1.5C goal for its Climate Aware Fund to better reflect the “quickly evolving nature of climate change risk and its impact on members’ investments”, others are still to develop clear approaches to ESG.
I’m going to make a bold statement; within the next two years, DC schemes that do not implement a positive ESG slant into their portfolios will be the exception rather than the rule. Responsible investment needs to become just “investment”, viewed as mainstream practice rather than exceptional.
Such a change also provides us with a great opportunity to engage members, particularly those in younger cohorts, to show more interest in their pensions – something we have singularly failed to do previously. How great a message would it be for members to hear that their money had helped influence Shell to link executive pay to reducing carbon emissions?
Product development within this space continues apace and it’s important for those looking after members’ money to ensure that they understand the different approaches being taken and match the manager and the fund they select most closely to their own views and beliefs on ESG. But the pace of development shouldn’t mean that trustees should wait for “the next great thing” before acting, a strive for perfection should not get in the way of good.
We can’t yet say that ESG is spreading like wildfire into UK pension schemes, but we are starting to see clear progress. This needs to continue as we start the new decade and recognise the part we have to play in improving both the financial futures of our pension scheme members and the world they will retire into.