Camden grills manager as ESG pressure mounts

The local authority scheme raised the issue with Harris Associates at a November meeting of the pension fund’s oversight committee.

According to the meeting minutes, chair Rishi Madlani was concerned that Harris “was not aware” of the reporting standards promoted by the Taskforce for Climate-Related Financial Disclosures and so “did not provide the committee with confidence as there was no assurance that ESG was embedded into its investment processes”.

Fund managers are responding to this demand but industry standardisation is needed in order to produce reporting that pension trustees can use to make effective decisions

Edwin Whitehead, Redington

Harris Associates has agreed to report back to Camden in line with the TCFD next year, and a spokesperson for the council told Pensions Expert that other asset managers “have been very responsive and helpful in all instances”.

Harris runs a global equity mandate that was worth £256m at the end of September 2019, according to the minutes, equal to just over 14 per cent of the total portfolio.

The move follows the introduction by the Pensions Regulator in October of new rules requiring pension schemes to publish a policy statement regarding the management of environmental, social and governance risks, including climate change. From October this year schemes will have to produce an implementation report, and will have to update this with actions taken from October 2021.

In addition, the Department for Work and Pensions has tabled amendments to the pension schemes bill — currently being debated in the House of Lords — that would require schemes to report climate risks in line with recommendations from the TCFD.

Campaigners up pressure

Pressure is also building on pension funds from campaign groups such as Extinction Rebellion, ShareAction and local groups, as well as from members.

At Camden’s November pension fund committee meeting, representatives of campaign group Divest Camden and the Unison trade union called for the scheme to exit all fossil fuel investments within the next five years. Unison branch secretary Liz Wheatley said the scheme should allocate more to renewable energy projects and other “alternative ethical investments”.

Camden has been one of the most active Local Government Pension Scheme funds regarding climate risk policies. It monitors climate risk across all asset classes, according to a spokesperson for the London borough council. It has also produced a range of reports and statements regarding the profile and impact of its investments with regards to ESG issues.

At a committee workshop in October, Camden councillors decided to prioritise aligning its investment beliefs with a selection of the United Nations’ Sustainable Development Goals.

Other LGPS funds — such as Islington, Swansea and Wiltshire — have taken action on climate risks, including reducing carbon emissions or divesting from fossil fuels.  

Managers on back foot

However, while pension funds are starting to act on climate change risk, the Harris Associates example raises questions over how prepared asset managers are to support schemes in these efforts.

Investment consultancy Redington has been reviewing asset managers’ reporting as part of its work with clients on their own risk reporting, according to Edwin Whitehead, vice-president, investment consulting. He believes the industry “will need to take significant strides in order to produce reporting consistent with new pension fund regulation”.

Mr Whitehead highlights managers’ stewardship reporting, which is usually published annually on a global basis. However, schemes will soon require “mandate-level reporting that is consistent with their specific financial year end and comparable across managers”.

TCFD reporting is a “work in progress” for schemes and asset managers, he adds. “Fund managers are responding to this demand, but industry standardisation is needed in order to produce reporting that pension trustees can use to make effective decisions.” 

David Jennings, client relationship manager at CEM Benchmarking, says: “Larger asset managers have the advantage of being able to allocate greater resource to ESG analysis and reporting, but all managers should be able to demonstrate how they integrate ESG considerations at some level or risk isolating themselves from their peers.

“Greenwashing is still an issue and managers should be careful not to mislead trustees as to the extent of their ESG activity.”

Jennings says trustees must be clear to external providers regarding their needs and priorities for reporting — but should also be aware of the limitations of different kinds of reporting.

Lars Hagenbuch, consultant at RisCura, says there is “probably” a gap between the needs of pension schemes and the data and support provided by investment managers. Data is particularly an issue regarding “scope 3” carbon emissions, which relates to emissions from a company’s supply chain and product use by customers.

Smaller schemes struggle

While Camden’s scale allows it to hold managers to account, smaller pension funds can struggle to influence their managers. Redington’s Whitehead says consultants’ manager selection processes play an important role in ensuring smaller clients’ interests are served. Schemes should enquire as to whether their consultants adequately scrutinise managers before awarding mandates.

In addition, a clear statement of investment beliefs can help consultants select managers and monitor them in line with clients’ requirements, Whitehead adds.

Fiduciary managers are also increasing their capabilities regarding ESG reporting, according to RisCura’s Hagenbuch. RisCura has its own fiduciary business and recognises the importance of quizzing its underlying managers more about their ESG credentials, he says, although the company is “not yet in a position to reliably and repeatedly execute this”.

“Simple things like agreeing the definition of the ESG parameters, and how best to respond — like ‘invest’ versus ‘engage’ — need to be looked at,” Hagenbuch says. “But we believe it is necessary, we know it needs to happen and are preparing for it.”