How to handle disagreements over ESG on trustee boards

As the demand to engage with environmental, social and governance factors intensifies, pressure is piling on to pension trustee boards to deliver sustainable outcomes. 

While disagreements and conflicting views on scheme management are to be expected, striking a balance between trustees’ fiduciary duties and progress on ESG raises additional issues for boards. 

ESG places a significant onus on trustee boards at a time when the industry is struggling to provide the kind of granular data that trustees require to make good strategic decisions

Pavan Bhardwaj, Ross Trustees

Divestment dilemma

In March, Scottish Widows unveiled plans to divest £1.5bn following an update to its exclusion policy, primarily targeting tobacco producers and distributors.

Tobacco has been a mainstay on ethical investors’ exclusion lists, and Pavan Bhardwaj, trustee director at Ross Trustees, explains that exclusions or disinvestments in other areas are less uniformly agreed upon. 

“Some trustees will feel strongly that certain sectors should be excluded from a scheme’s assets,” says Bhardwaj. 

“Others will feel that these assets are better held by a group of trustees that are willing to engage, rather than potentially sold to an investor(s) that may not prioritise engagement or share similar policies on ESG.”

Similarly, Wayne Phelan, chief executive at Punter Southall Governance Services, points to hydrocarbons as a “hotly contested” topic, with trustees grappling to decide whether such investments belong in an ESG portfolio.

On one hand, existing hydrocarbon fuels such as petrol and diesel emit large amounts of carbon dioxide, yet many of these businesses are pivoting towards renewable forms of fuel, including the research of low-carbon biodiesel.

But in response to the issue, some trustee boards are taking “pigeon steps” in moving to ESG-related strategies, says Vassos Vassou, director at Dalriada Trustees.

“This can be a way of allaying some trustees’ concerns while still moving in the right direction. It also still gives trustees some content for their implementation statements when reporting back to members,” he says.

Furthermore, as Bhardwaj explains, “the concept of a ‘just transition’ and phased move towards a green economy can divide opinion”, especially in light of recent geopolitical tensions.

The Russia-Ukraine crisis has highlighted the “potential problems with a sudden transition away from fossil fuels” he adds, at a time when green infrastructure is not yet “sufficiently developed” to meet energy requirements.

Blame the data

But such disagreements among trustees are not always rooted in polar-opposite views. 

Phelan notes that misunderstandings can arise on the back of everyday difficulties, such as inconsistent and vague data, as well as a bias in the volume of research available leaning towards environmental concerns.

He says: “Lots of focus can be on the E solutions rather than E, S and G. S and G are more complicated to understand than E. Naturally, this is where more misunderstandings arise, but I would describe it in that way rather than a disagreement.”

Yet due to the relatively recent introduction of ESG methodologies into pension schemes, Bhardwaj notes that the continually evolving nature of the space can be a source of disagreements.

He says: “ESG places a significant onus on trustee boards at a time when the industry is struggling to provide the kind of granular data that trustees require to make good strategic decisions.”

As such, Bhardwaj says that trustees need to recognise this and “strive for constructive dialogue with advisers”.

Gail Izat, workplace managing director at Standard Life, agrees. She believes that the best practice for trustees is to have governance processes in place to facilitate challenging debate, helping to create consensus. 

“This process is usually bolstered with input from independent advisers, as well as subject-matter experts from the scheme funders,” she says. 

“To ensure the robustness of the process, and so that it stands up to scrutiny, it’s essential that the board has the facility to take expert advice and the best data available into account, in order to make informed decisions.”

Conflict resolution

However, when pension trustee boards are truly unable to come to an agreement over an ESG issue, there are other avenues available to which a trustee board can turn, says Bhardwaj.

“Where boards genuinely have strong disagreements over ESG and constructive dialogue with advisers and managers proves futile, adding a professional trustee or moving to fiduciary management or an outsourced chief investment officer can break the deadlock,” he adds.

Additionally, surveys can help uncover where the “true centre of gravity” lies when boards are struggling to identify the best course of action.

Izat points out that trustees can call on “increasingly developed information from their advisers and subject-matter experts” to help reach a consensus on ESG issues.

Vassou adds: “Trustees are learning about these additional duties, generally engaging enthusiastically — after all, it is much more interesting than [guaranteed minimum pensions] equalisation — and trying to do the right thing.

“I still expect this process to evolve further over the medium term.”