New year, new attitude to ESG compliance?

Australia was not the only country to face a natural disaster widely linked to climate change in 2019. Wildfires destroyed homes in California, and returned to Greece for the second year in succession. Ice coverage at the poles remains below average, with climate scientists now linking this retreat to the carbon time bomb of melting permafrost.

‘So what?’ goes the classic editor’s question of reporters, and some pension scheme decision-makers appear to be taking a similar stance.

A large proportion of consultants surveyed by the Society of Pension Professionals characterised their trustee clients as doing the minimum possible to comply with environmental, social and governance investment regulations.

Meanwhile, a ShareAction report has found that many master trusts, supposedly the pinnacle of good governance following their authorisation by the Pensions Regulator, are falling short on responsible investment issues.

Apathy abounds

When it comes to strategic pension decisions, trustees and their advisers owe it to the members not to be swayed by hysteria – the meteorological dynamics fuelling Australia’s fires are an anomaly, and such headline-grabbing events are not likely to change the long-term value of financial assets.

Indeed, the oil and gas subsections of the FTSE indices staged a strong recovery right through December.

There are also many other pressing issues that can be overwhelmed by the current media and popular preoccupation with climate change – other ESG-related investment issues must not be neglected, and neither should the basic principle of paying the right people the right pension at the right time.

But what was particularly disappointing about the SPP report was the suggestion that by far the biggest driver of behaviour change on ESG was regulation, with the financial implications of unsustainable investment rated as one of the least persuasive arguments for change.

Do some trustees then believe that the government’s new rules on statements of investment principles are just pandering to the electorate, and not based on robust ideas? If so, they should be prepared to say so openly – do get in touch as we always welcome the views of any trustees.

How big a risk can you take?

Investors may decide that ESG is a buzzword; an obsession of millennials and the liberal media. Certainly, ESG has been readily adopted as a marketing tool by asset managers seeking to prop up their ailing active fund businesses. But in setting their SIP they must also ask themselves questions befitting of those with a fiduciary duty.

I am reminded of the question framework for trustees setting liability-driven investment policy, usefully explained to me by one consultant. He said schemes should ask what the market view is on the direction of interest rates, whether they think they know something the market does not, and how big they want this bet against the market to be in proportion to other risks to their funding level.

Turning back to ‘financially material considerations’ (October’s investment regulations have no truck with ethics), do those apathetic trustees know something that departing Bank of England governor Mark Carney, master trust Nest and other leading investors, and a wealth of climate scientists and economists do not? If so, how big a punt are they prepared to take on being right?

Angus Peters is editor at Pensions Expert. You can follow him on twitter @peters_angus and the team @pensions_expert.