Dalriada’s Vassos Vassou explains why trustees must take ownership of environmental, social and governance risks in their pension funds’ investment strategies, and how asset managers and consultants must be held to account.
It is clear that trustees need to view and treat environmental, social and governance issues with the respect and urgency they deserve.
ESG factors will change the investment process dramatically over the coming years. Trustees must take back control and hold their investment consultants and managers to account.
That is not to say that trustees are not already engaged when it comes to ESG. Being a professional trustee, I have the advantage of sitting across multiple boards and have noticed increased attention when this topic comes up in meetings.
If trustees come under pressure to move money away from investment managers who do not invest ‘morally’, some managers will need to change if they are to retain their current market share
Winds of change
As it stands, ESG is primarily considered a financial matter among investment managers. However, while it receives industry-wide support and is considered good practice among those who factor the criteria into their analysis, the debate is changing.
As society puts more pressure on business and institutional leaders to take responsibility for investing both sustainably and ethically, I expect they will be held to account on moral grounds as well as financial ones.
As trustees, we are told that ESG should feed into the stock-selection process as it is an important risk factor. For example, we may be advised to refrain from investing in the fossil fuel sector, which may not be around in 10 years’ time. Doing this will mean that ESG supports our financial returns.
But, as the requirement to invest on a moral basis becomes more prominent, I expect trustees will become as equally concerned with how the moral content of their investment decisions affects their own reputations as much as their schemes’ – and members’ – financial matters.
As statements of investment principles become publicly accessible online, trustees invested in ‘sin stocks’ such as tobacco or oil may be at risk of being named and shamed – something we have already started to see in the investment world. We have even seen it in the pensions world with Extinction Rebellion interrupting a Pensions and Lifetime Savings Association seminar last summer.
If trustees come under pressure to move money away from investment managers who do not invest ‘morally’, some managers will need to change if they are to retain their current market share.
Take back control
Currently, the balance between a trustee and investment manager is not quite right. Trustees, as asset owners, have a responsibility to tell investment managers what to deliver on ESG. Performance can then be tracked in an appropriate way.
Investment consultants have a role in helping trustees keep track of the ESG performance of their recommended investment managers. If the consultant reports that ESG performance has been poor, trustees should engage with the manager and demand improvements or move their money away. This would put a greater emphasis on ESG-related investment decisions and bring these in line with how we look at investment performance decisions in general.
The advice trustees generally receive on ESG from investment consultants is improving, but is still a long way below where it needs to be. For example, we often see statements suggested by consultants being added to SIPs that are more of a tick-box exercise than a call for decisive action on ESG issues.
Since the introduction of the setting of investment objectives for consultants, trustees are now in a better position to make them more accountable for the advice they provide to trustees. If the investment consultant does not meet those objectives, trustees will have more explicit evidence at their fingertips to support a decision to replace them with someone who can.
ESG is here to stay. As trustees we have already had to change our reporting requirements and there are further similar requirements in the pipeline. I believe this will lead to the investment process changing materially in the next few years, as pressure grows on trustees to act in the interests of wider society.
Trustees will need to provide clear ESG messages and instructions to their investment managers and consultants, and the investment community will need to deliver on those instructions.
Vassos Vassou is a professional trustee at Dalriada Trustees
