"Either you are sustainable or you’re not"
Had you been holidaying in Narnia, then you might have had an excuse for not being aware of, and possibly inconvenienced by, the Extinction Rebellion movement, which besieged the capital in recent weeks. Greta Thunberg has been speaking as a voice of a generation with politicians of all persuasions about the devastating impact of climate change, if we don’t meet the 1.5 degrees global warming target. And, hardly a day goes by without another worrying report being issued. We’ve been warned about the cost of soil degradation and the loss of its carbon storing properties through deforestation, poor agricultural practice and erosion. The Government’s own independent Committee on Climate Change has recommended that the UK sets a legally-binding target to have net zero emissions of greenhouse gases by 2050. A landmark UN report – IPBES’ 2019 Global Assessment Report on Biodiversity and Ecosystem Services – alerts us to the possibility that one million species are facing extinction and the potentially devastating consequences for life on earth. - Greta Thunberg
It’s easy to feel overwhelmed by the enormity of the problem. I, on the other hand, am excited about the prospect of meaningful change that can start with us. Having been categorised over decades as dinosaurs (oh the irony), pension funds now have the chance to lead – to show those who rely on us for their future wellbeing and prosperity - that we can be trusted to drive forward the changes that will sustain our planet.
In my view, 2019 is a pivotal year for sustainability. Greta’s quote at the top of this article couldn’t be more direct. So, what are the priorities for trustees and governance committees when it comes to sustainability?
Firstly, all trustees boards will have to amend their Statement of Investment Principles to set out publicly how they have considered financially material environmental, social and governance (ESG) factors, including climate change - in investment decision making and their policy towards stewardship.
The effective date is 1st October 2019. But that’s only a start. Trustees will also be required to own and disclose their policy on voting rights and engagement – not the investment manager’s policy. DC schemes must make these disclosures in relation to the default investment strategy. In October 2020, these schemes will be required to set out in their annual reports just how they have implemented their policy.
It seems to me that many trustees and advisers haven’t yet realised quite how a big a deal this is, particularly since the Stewardship Code is also being revamped. The UK was the first country to have a stewardship code in the wake of the last financial crisis. It applied only to listed equities and was deliberately light touch; virtually all asset managers signed up to it.
The new draft Stewardship Code is a step change from where we have been. If introduced as envisaged, the Code will focus on how effective stewardship delivers sustainable value for beneficiaries, the economy and society.
So to be clear, we are talking about outcomes and not policy statements. Trustees and others will have to clearly demonstrate and report on the alignment of purpose, strategy, values and culture with their investment managers. At its heart, the new Code identifies the care of the beneficiaries’ assets as the primary purpose of stewardship.
That doesn’t mean the investment consultants get off scot free. The new Code will oblige them to comply with specified Principles and Provisions. Which reminds me, over a year ago, 16 investment consultants signed up to an UKSIF/AMNT initiative to ensure that ESG issues were properly raised with trustees. They stated “We believe that ESG is a fundamental part of success in long-term investing, therefore we are drawing the guidance to the attention of UK pension fund clients through a variety of routes such as putting consideration of ESG on trustee meeting agendas, issuing briefings and/or holding training sessions. We also recognise the significant role that clientfacing consultants can play in ensuring that our clients are well informed on the issues”. What progress has been made? This may be a good time to review the performance of your investment consultant.
For the last four years I’ve had the privilege and pleasure of chairing the UK Sustainable Investment and Finance Association (UKSIF. org.uk). When I joined the Board in July 2014 I wrote that “The increasing recognition of global ‘mega-risks’ such as climate change and resource depletion mean that sustainable investment must move up the agenda of everyone involved in pensions; trustees, administrators and sponsors, offering both DB and DC schemes. I would encourage everyone involved to collaborate in developing environmental, social and governance (ESG) policies that influence investment strategy, fund manager behaviour and ultimately performance”.
We’ve undoubtedly made progress, and while ESG factors are fully integrated into investment processes for some fund managers, it’s taken legislation and codes to drag others to recognise the financial and non financial risks of not incorporating ESG into their thinking.
Trustees must ask their fund managers about their own policies on ESG and climate change, and whether those policies extend to the funds they manage.
A recent survey by the Climate Change Collaboration would suggest there’s still plenty to be done. David Cumming of Aviva Investors said recently on the Today programme, “Climate change is an issue. Companies have to be responsive to it. Companies that aren’t seen as responsive to their environmental responsibilities are increasingly deselected by fund managers from their portfolios. Customers and consumers want to invest in companies with a positive climate change culture”.
Outside trust-based schemes, the FCA has an open consultation on how climate change and ESG factors feature in the responsibilities of Independent Governance Committees (IGCs). The FCA proposes a new duty for IGCs to report on their firm’s policies on ESG issues, consumer concerns and stewardship, to help protect consumers from investments that may be unsuitable.
We have a huge responsibility ahead of us. I’m not expecting you to glue yourselves to the Stock Exchange, or any other building for that matter, but I am expecting everyone to step up to the plate. For many, this represents an entirely new area of knowledge and understanding and a need to get up to speed very quickly indeed.
Are you ready to adapt? The alternative is too terrible to contemplate.
Last update: 26 February 2021