How can schemes make ESG compliance meaningful?

Two-thirds of pension schemes in the UK failed to even submit their revised statements of investment principles, required to outline positions on environmental, social and governance risks, by the October 2019 deadline.

Analysis of their content by the UK Sustainable Investment and Finance Association suggested heavy use of boiler-plate statements drafted by consultants, and the organisation called the regulator’s response “as vague as trustees’ statements”.

As the October 1 deadline for submitting the second annual attempt at the SIPs approaches, the heat is turning up on schemes.

If your approach to this as a trustee is just to get your consultant to write some wording that makes you look compliant… you’re not really doing this justice

Stuart O’Brien, Sackers

The Department for Work and Pensions and the Pensions Regulator have announced plans to create a digital repository for the statements in order to monitor compliance.

The statements will also have to be accompanied by an implementation report for both defined contribution and defined benefit plans, although the scope of DB requirements is somewhat narrower.

Pay attention to previous criticisms

Given these mounting pressures, what can trustees do to ensure that their new statements are meaningful, and pass muster with their new scrutineers?

For starters, schemes would be wise not to ignore criticisms of their previous SIPs, according to Stuart O’Brien, a partner at law firm Sackers.

“If your approach to this as a trustee is just to get your consultant to write some wording that makes you look compliant… you’re not really doing this justice,” he says.

However, he stresses that the SIP is only a headline policy document, which for some schemes masks more detailed internal policies and engagement actions.

For others, robust statements on holding managers to account will not be backed up in practice, although Mr O’Brien says: “I think the implementation statements are going to be harder to greenwash.”

More transparency with members needed

Given that these statements are member-facing, trustees may decide to highlight select examples of their work over the year, following the lead of big-name schemes. Master trust Nest, for example, already produces a dedicated ESG report including key engagement themes.

But where Nest’s approach to reporting is comprehensive and sits alongside a detailed SIP, Mr O’Brien voices a concern that the flexibility afforded by the government could mean some schemes “say very little, or just pick out a few edited highlights that look good”.

He says this reticence to give members the full picture extends even to schemes that are leading the market in terms of what they actually do: “There’s a surprising amount of nervousness around putting information out there for members.”

Cautioning schemes to embrace transparency before it is forced upon them, he adds: “There’s a risk here that if trustees don’t start being more transparent with members, we’re going to have organisations like Make My Money Matter putting pressure on them to do more. Some of that pressure might be well-intentioned, but not necessarily appreciate the environment within which trustees operate.”

One cardinal sin that could be found out by implementation statements is that of writing SIP policies that trustees are not able to live up to in practice.

“When you’re writing your SIP, don’t lie,” says Mr O’Brien, warning that expectations of managers should be realistic, and commercial relationships handled sensitively.

Still, some trustees are not currently satisfied with offerings available in the wider asset management market, giving the next round of SIPs and implementation reports the potential to spark tension between client and provider.

The challenge of client voting policies

The Association of Member Nominated Trustees has clashed with pooled fund managers over their reluctance to accept client-directed engagement policies, for example by allowing schemes to vote their own shares.

Currently working with policymakers and regulators to correct what it perceives to be a “market failure”, the group says this could limit trustees’ ability to say and do meaningful things in relation to ESG.

“The majority of UK fund managers are simply not willing to accommodate client voting policies in pooled fund arrangements. This gives me concern as to the degree to which fund managers will implement any aspect of a client’s stewardship or ESG policies in said arrangements,” says Leanne Clements, project manager for AMNT’s Red Line Voting initiative.

“Given regulatory expectations on asset owners to develop ESG and stewardship policies, this represents an impasse that must be addressed, and will hinder the quality of the implementation statements.” 

Ms Clements says that at a minimum, managers should be expected to report against the goals set out in SIPs and other trustee policies, so that clients can judge whether they are a good fit for the scheme and hold them to account.

“Put simply, the implementation statements should not merely be a summary of their fund managers’ stewardship and ESG activities conducted on their behalf, but a benchmarking exercise between their own policies and that of their fund managers,” she says.

“The reporting that the fund manager provides their clients should be driven by the trustees’ agenda and areas of priority, not the fund managers.”

Managers, for their part, see this debate differently, arguing that collective action is key to their attempts to effect change. This could be undermined by split voting, they say.

“The use of pooled funds gives smaller schemes the opportunity to engage on a scale where their voice can be heard,” says Mark Johnson, head of institutional clients at Legal & General Investment Management.

“We are always listening to clients to ensure we understand what matters to them, and we implement our policies consistently and across all resolutions – never abstaining – to make lasting and effective change.”

Mr Johnson says the proliferation of indices incorporating different approaches to responsible investment should allow implementation reports to match schemes’ principles, and that managers need guidance before helping clients with reporting.

“We are discussing with clients and consultants how they wish to report on the implementation of their SIP – we have the data but await with interest the draft template from the Pensions and Lifetime Savings Association’s working group,” he says.