Pension funds are becoming more active in exercising ownership to improve governance of investee companies, but there is still scope for investors to further integrate environmental, social and governance factors, a panel of experts from across Europe has said.
In February last year, the London Stock Exchange Group issued guidance to companies on good practice in ESG reporting, noting that “the global guide responds to demand from investors for a more consistent approach to ESG reporting, which is now a core part of the investment decision process”.
It’s sad to recognise that until recently most pension fund investors were not behaving like real owners
Philippe Desfossés, ERAFP
Investors have started taking ESG into account, but there is still scope to exercise ownership more actively, a group of international experts said at the World Pensions Forum held in Paris last week.
Global financial crisis has served as catalyst
Alfred Slager, professor of pension fund management at TIAS School for Business and Society, who is also a trustee for Stichting Pensioenfonds voor Huisartsen, the Dutch GPs’ pension scheme, said the 2008 crisis has served as a catalyst for many funds to put in place a proper investment process, which has helped enable ESG integration.
Rather than schemes adjusting their investment process to the product they are investing in, asset managers now frequently need to conform to guidelines from the funds.
“Most pension funds now have an investment process in place they can say is transparent; we are in charge of the process,” he said.
“Ten years ago, a number of pension funds in the Netherlands were unable to integrate ESG because they were not in charge of the process,” Slager added.
Taking charge and exercising ownership is a relatively new development for many asset owners, agreed Philippe Desfossés, chief executive of Établissement de Retraite Additionnelle de la Fonction Publique, the French pension fund for civil servants.
“It’s sad to recognise that until recently most pension fund investors were not behaving like real owners. They were not exercising the rights that come with the ownership of something,” he said.
Those rights also come with responsibilities, however: “If you own a house you know you have to keep that house in shape, you have duties.”
Owners deserve transparency
A shift towards greater transparency has played an important role in pushing ESG up scheme agendas.
Iain Richards, head of responsible investment, EMEA at Columbia Threadneedle Investments, said: “What’s driving change is transparency. You must explain how you are approaching these issues.”
He said transparency has “been a phenomenal catalyst” that has “made people stop and think about” ESG issues such as corporate governance.
Desfossés stressed that companies need not be concerned about investor pressure. “As we are the owner, we are not in a confrontational mood, we are already invested. But as owners, we are owed transparency,” he said.
ESG scores are not perfect
Assessing companies on their E, S and G is not always easy, however. Richards said ESG ratings available in the market “are all completely contradictory”.
This has led to growing scepticism, he claimed. “If you look at the surveys people say there is a huge interest in responsible investment, impact investment; the other thing we see is growing scepticism,” said Richards.
Desfossés remained optimistic: “Yes we need better ESG scores, but it’s improving. We are collecting more data, we are putting more pressure on investees to provide better information.”
Govt 'minded' to introduce mandatory trustee ESG statements
Late last year the government said it will consult on whether trustees should be required to state their policies on sustainability, member concerns and stewardship, and will clarify current legislation as part of a wider push to increase pension investment in social and illiquid assets.
But there are barriers to engaging with investee companies. One of them is size, as to improve the governance of a major company, even a multi-billion pound scheme might not be strong enough.
“To get to the CEO of a big major, no way" said Desfossés about his €30bn (£26bn) scheme, "but if we join a coalition”, investors start to have influence.
Another issue is that equity holdings have been declining at defined benefit schemes, noted Anna Tilba, an associate professor for governance at the Northumbria University School of Law.
But she also said progress has been made, with the development of the stewardship code, or the work done by the Law Commission.
“People are listening,” she observed. “A lot of pension funds are supporting these initiatives,” even though there is “still a long way to go to have ESG integrated”.
