Pension professionals yet to reach consensus on ESG monitoring best practice

The survey showed that the pensions industry appears to be reacting to regulatory and government pressure rather than driving the ESG agenda. Schemes were required to have a policy around ESG, but 95 per cent of respondents said they were seeing no changes to portfolios.

That said, nearly 60 per cent of respondents thought clients showed a genuine interest in ESG. Anecdotally, there was a growing interest and emphasis on ESG.

Given the reliance on information from investment managers, it will be important that trustees are provided with standard information that allows comparison across investments, managers and schemes

A lot has changed since the original survey was carried out, most notably the Covid-19 pandemic. We have also seen the Department for Work and Pensions consult on taking action on climate risk, which will require certain schemes — in particular those with assets of more than £5bn — to have governance and reporting arrangements on climate change from October 2021.

The SPP has therefore carried out a follow-up survey of its members in October 2020 to see how clients’ thinking on ESG has developed.

Scepticism diminishes

As you might expect, members have seen increasing engagement from clients on ESG as the regime has bedded down. 

The number of schemes engaging on ESG has increased, with 70 per cent of respondents reporting that most of the schemes they advised are showing a genuine interest in ESG. 

Those reporting that their clients were making material changes to their portfolio because of ESG increased threefold from 2 per cent to 7 per cent. The estimated proportion of trustee boards treating it as tick-box exercise was 25 per cent, down from nearly 40 per cent. 

There was a continuing majority of respondents (more than 60 per cent) who took the view that defined contribution schemes above a certain size should be required to offer a range of ESG funds that are suitable at different stages of a member’s life.

However, again the new survey showed very limited engagement with members on their views on ESG. Eighty-five per cent of respondents said that in their experience, fewer than a quarter of schemes had sought their members’ views on ESG, which was consistent with respondents to the November 2019 survey.

Consensus still lacking

The financial benefit of ESG has been borne out in the initial phases of the pandemic. Studies have shown that many ESG funds have outperformed their non-ESG counterparts, thanks to their skew towards tech companies and underweight positions in struggling fossil fuel extractors.

The SPP therefore asked SPP members whether the Covid-19 crisis had changed their clients’ approach to ESG. One in five respondents said the pandemic had, with 5 per cent saying it caused a step change, and 15 per cent saying the pandemic provided impetus to changes that were already under way.  

Practically monitoring schemes’ ESG exposures will be a key challenge for trustees, with consensus practice still some way from being identified in a fragmented industry.

Here, respondents indicated their clients would be adopting a variety of approaches. Twenty-eight per cent reported their clients intend to rely on periodic manager presentations, while 40 per cent said their clients would be looking for a scheme-specific report on a regular basis with a focus on voting and engagement.

Within that latter group, around a quarter (10 per cent of all respondents) were looking for specific climate risk or carbon exposure monitoring. The final 32 per cent of those surveyed were still undecided or did not know the approach their clients were taking. 

Given the reliance on information from investment managers, it will be important that trustees are provided with standard information that allows comparison across investments, managers and schemes.

James Riley is president of the Society of Pension Professionals