How scheme trustees can make implementation statements matter

While the requirements for defined benefit and defined contribution schemes differ, the intent is broadly the same: to report on how effectively stewardship responsibilities have been carried out during the reporting year.

Though the reports are primarily a statement of assurance that investment practices are meeting their goals and managers are fulfilling their obligation, for all concerned they offer an opportunity to probe, reflect and seek to improve stewardship practices. 

Implementation statements are ideally placed to provide pension fund beneficiaries and investors with the kind of information that reassures them that good stewardship is taking place

For pension schemes, the guidelines about how to approach these statements are fairly broad — and as a result, best-practice standards are varying.  

At Majedie, we believe there is an opportunity to make these statements matter in the overall stewardship ecosystem. They can be a framework through which to probe and engage in a similar manner that trustees have come to expect from managers when analysing investments.   

On the surface, this appears to be the intention of the new rules. Trustees are required to report on how managers uphold the scheme’s statement of investment principles, including the scheme’s statement on environmental, social and governance factors. 

This implies increased connectivity between pension trustees and asset managers, contributing to what the Investment Association calls “an economy-wide approach to stewardship”.

While trustees report on a variety of stewardship activities, including ESG-related considerations, this is often limited to voting activity and engagements — information which, while important, forms a baseline of what is required, in our view.

Thinking outside the box

Obviously, implementation statement requirements will help to increase transparency and provide a degree of assurance on ESG matters. But will they genuinely improve stewardship practices? 

For many, the purpose of good stewardship is not just box-ticking and acknowledging certain activities have been fulfilled. 

Such an approach is not in the spirit of how the Financial Reporting Council’s Stewardship Code 2020 defines stewardship: “The responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.”

While a manager can exercise voting rights that have no impact on investment decisions, the same can be said for company engagements. 

These might be classed as stewardship activities, but in many cases they may have little material impact on investment decisions, long-term value creation or sustainability. 

It is therefore important to think beyond the baseline reporting requirement and to understand how these stewardship-related activities align with the wider investment process. 

Ideally, managers will not only undertake stewardship activities themselves, but will also have a process by which ESG, voting and engagement are integrated into their investment decisions to the degree that they genuinely impact their buy, sell and hold decisions, as appropriate. 

Improving stewardship

In its November 2020 paper entitled Investing with Purpose, the IA set out specific recommendations for how investors, companies and, in fact, the entire economy can improve stewardship. 

One of these stated that UK pension schemes should be required to explain how their stewardship policies and activities are in scheme members’ best interests.

To do this, asset managers should state explicitly the extent to which they integrate material ESG considerations into their investment process and how these considerations directly impact their voting, their engagements and, crucially, their investment decisions.  

Implementation statements are ideally placed to do just this — provide pension fund beneficiaries and investors with the kind of information that reassures them that good stewardship is taking place. 

They also provide an opportunity to avoid box-ticking and to better understand the significance of the stewardship activity and how it works to scheme members’ best interests. 

Has it helped the fund’s performance? Has it brought additional benefits to society, the environment or other stakeholders? What does the scheme member gain from the activities on which the implementation report currently covers? 

In short, implementation statements provide an excellent opportunity to probe, reflect and seek to improve stewardship practices for all concerned. 

Imran Sattar is a fund manager at Majedie Asset Management