As many as four out of five UK pension funds now screen their managers for stewardship activity as part of the selection process, demonstrating the growth in environmental, social and governance considerations among institutional investors.
A National Association of Pension Funds engagement report released this month revealed 80 per cent of UK pension schemes currently screen managers for stewardship activity during their selection processes, an increase from one third a decade ago.
ESG issues are undoubtedly becoming more significant to all players in the pensions supply chain
Barry Parr, AMNT
Industry experts said huge steps had been made among pension funds in terms of taking ESG factors into account, but warned of the challenges of getting beyond a 'tick-box' mentality, and engaging small to medium-sized schemes in the process.
The NAPF survey took in responses from 50 of its pension fund members with combined assets under management of £419bn. Another survey released this month by asset manager Aviva Investors found 92 per cent of the 60 asset managers believe ESG factors are relevant to their wider business.
This follows a report by the Law Commission in June that supported investors looking to take such concerns into account. “[ESG investment] works on the basis that companies do better in the long term if they are well-run and sustainable, and have loyal suppliers, customers and employees,” said the report.
Despite this progress, the data reflect a lack of deeper engagement from asset owners. While 90 per cent of respondents to the NAPF survey agreed ESG factors can have a material impact on the fund’s investments in the long-term, just 53 per cent felt institutional investors have played an active enough role as stewards of investee companies over the past year.
Barry Parr, founding co-chair of the Association of Member Nominated Trustees and a trustee of the Pensions Trust, said: “ESG issues are undoubtedly becoming more significant to all players in the pensions supply chain, most notably at the level of asset manager and executive.”
He said small to medium-sized schemes continue to struggle to get ESG factors onto the agenda in trustee boards, adding: “In the UK larger schemes with greater resources have tended to be more progressive and have stronger policies on ESG issues.”
William Pomroy, policy lead of corporate governance at the NAPF, said the increased focus on ESG by pension schemes over the past 10 years has been part of a wider search for value.
He added: “The importance of stewardship has long been an implicit element of fund manager relationships but now, increasingly, ESG issues are being identified as a way of managing and mitigating risks across portfolios rather than just as a tool for stock selection."
Initiatives including the UN Principles for Responsible Investment and the Financial Reporting Council's UK Stewardship Code have boosted the prominence of ESG in the minds of investors.
But Parr warned of the dangers of these becoming mere box-ticking exercises, adding: “Some organisations, schemes and asset managers might see these as necessary boxes to tick in order to continue credible business operations."
The survey results revealed the schemes have increasingly high expectations of manager engagement levels. Being a signatory of the UN PRI is now seen as a base requirement for evidencing ESG commitment, with just 5 per cent of survey respondents saying this was their priority.
A further 60 per cent of respondents now actively engage in stewardship questions during a manager beauty parade and selection process, probing the expectations and approaches of the manager.
