Further industry harmonisation and consensus around standardisation is needed if there is to be a smooth adoption of new regulations on ESG reporting within the pensions market.
This was one of the key conclusions from a wide-ranging discussion at Corporate Adviser’s recent virtual roundtable examining the ways the industry can meet the raft of new requirements in an more effective and efficient way.
At the core of the new regulations are requirements to disclose the way environmental, social and governance (ESG) factors have been embraced by DC schemes.
The requirement for schemes to make their Statement of Investment Principles (SIP) publicly available came into effect last year. But from this month trustees must also produce an Implementation Statement which explains how they have followed and acted on the investment policies outlined in the SIP.
This will include trustees’ policies, and actions regarding ‘financially material’ ESG factors, including climate change.
This statement should also include details of actions taken regarding the stewardship of investments, such as exercising voting rights and engagement activities to improve ESG measures, alongside the extent to which members’ views on ESG and other issues are considered when planning investments.
For trustees the challenge is gathering, processing and presenting this mountain of new complex information from asset managers and other sources, on both intention and actions in regards to ESG factors. It is a challenge providers and asset managers have also been grappling with.
Data challenge
Consultants and providers attending the round table agreed that there was scope for further collaboration and standardisation to reduce work-load and cost, and to improve comparability of information, and all were of the view that there were encouraging signs that the industry was moving in this direction.
Barnett Waddingham associate and policy and strategy lead Amanda Latham said the PLSA’s Investment Consultant Sustainability Working Group has done a lot of ground work devising and testing templates, such as the Vote Reporting Template ,which will help standardise the information requested from asset managers.
Latham said: “At the moment these are with asset managers and trustees to see if these work for them.”
Hymans Robertson head of responsible investment Simon Jones agreed that the working group had started to tackle the issue of data collection harmonisation, but he says there was scope for further work in this area.
“Collaboration will lead to better practices throughout the industry, from asset managers to asset owners and investment consultants,” he said.
There are obvious benefits of collaboration to asset managers, consultants and scheme providers. Jones said in the majority of cases the information requested from asset managers by different schemes will be “largely similar”, so streamlining this process saves both time and money for all involved.
To make this more efficient though those attending the event said it would help if there was a more detailed industry-wide taxonomy so asset managers respond to questionnaires in the same way.
Jones said there has been a problem for some trustees to know how to frame questions to get the exact information they need. This working group will help resolve many of these issues, he added.
Harmonisation call
Jones also felt there is an advantage for investment consultants if this ESG data can be collected and presented in standardised formats.
“This gives us the opportunity to move beyond these core facts and figures that are required by legislation, and really add value for the client,” he said.
Those attending the event were in no doubt as to the extent of this new onerous and exhaustive governance issue for trustees. They agreed though that consultants had a vital role to play supporting trustees – as well as being a catalyst for change.
LGIM head of DC client solutions Simon Chinnery pointed out that there was an urgent need for trustees, consultants and asset manager to fully engage with these issues. “This is an issue that is not going to go away,” he said. “There is going to be even more of an emphasis on ESG reporting, particularly in relation to environmental issues going forward.”
He pointed out that the draft Pension Schemes Bill makes is “pretty prescriptive” about climate change, and the need for asset managers and investors to tilt towards alignment with the Paris Agreement on climate change — which aims to limit global temperature rises to just 1.5 degrees.
He added: “This is just phase one. Schemes should expect increased reporting and data sharing on these issues.”
Those attending the event agreed that this regulatory move was being driven by greater consumer awareness about climate change. It has been widely cited that the ‘Greta Thunberg’ effect has resonated into boardrooms, while initiatives like ‘Make My Money Matter’ — set up by Richard Curtis to encourage greener pensions — are generating more awareness among consumers.
When Curtis launched this campaign, tweets by a host of celebrities, including Gary Lineker, helped propel pension investments out of the financial pages and onto the front pages.
Tough deadlines
Given much of this data should be ready for publication imminently how ready are trustees and schemes for the forthcoming changes, and more importantly what might be the consequences be for those still struggling to put this information together?
Pinsent Masons partner Mark Baker said most schemes appear to be on track. He says his impression was that trustees are “confident” about getting the right information from their asset managers. But he said the deadlines and the amount of information needed is challenging.
Baker said it remains to be seen how The Pensions Regulator will respond when there are technical breaches.
He said: “We would hope that schemes won’t be punished for technical breaches at this stage. However, the advice is to evidence the work they are doing to comply with these guidelines. This should put them in a better position with the regulator, and should ensure they fully compliant with all the information needed for the following year.”
Latham said that there may be lessons to be learned from how the regulator has acted previously, for example when rules were introduced making it mandatory for schemes to make publish the Chair’s statement.
She pointed out that these new ESG rules sit under a different set of regulations to those around the Chair’s statement, which means the regulator will have more discretion on how it responds to breaches.
“There certainly needs to be alignment across different parts of the industry and hopefully the regulator will recognise this and see how schemes are adapting to this new regime.”
Trustee hurdles
Trustees face a number of hurdles complying with this new regime.
One obstacle is getting appropriate information from their asset managers on the ESG strategies being deployed. The other is to get a clearer picture of the views of their own members, and to ensure this is reflected in their investment strategy.
When it comes to the first hurdle Jones said there is some variance as to how well prepared asset managers are. The larger asset managers, particularly those with significant index tracking options are better prepared, but he says
some smaller specialist asset managers are finding it more challenging to provide the correct data.
Willis Towers Watson sustainability specialists Shahrazad Khan said much depends on the asset managers own track record on ESG issues. “Actions often need to come before policy,” she said.
Jones argued there is also a need for asset managers to be more transparent around all areas of stewardship, and for this information to relate to specific funds, rather than simply a “house view”.
LGIM is one provider piloting new software from Tumelo that allows members to express their voting intentions on key board resolutions relating to the companies in their portfolio, offering the potential for a significant upswing in member engagement around stewardship.
Member views
Trustees also face difficulties when it comes to surveying their own members. Jones says it is no easy task to get a clear picture of members views on a range of issues, from green energy, pollution, fair pay, tax policies, and plastic use.
Jones said: “Surveying members views has always been a tricky exercise. Levels of engagement can be relatively low, and it is difficult to know if this a fair reflection from across the membership, or the views of a smaller self-selecting vocal minority that care very deeply about these areas.”
The requirement to get this information and update it regularly should prove useful he says. Technological can help in this process he says, with asset managers like LGIM offering innovative systems. “Rather than just a snapshot in time you can have ongoing feedback on which issues, or shareholder votes that members are interested in.”
Providers like LGIM have said they are committed to sharing information on member surveys, which can help inform
trustee decisions. As Chinnery pointed out, surveys indicate a growing awareness and concern about climate change issues, particularly among younger millennials.
Khan said while this industry information is useful it should not be a substitute for schemes seeking more information about their own members’ views.
“Trustees should be aware of how their own membership differs from the more general population. Their members may not be representative and may have quite different views.”
A worthwhile exercise?
The volume of data trustees now have to process may look daunting. But Khan said it is important trustees don’t lose sight of the reasons why these changes have been introduced.
“This data has the potential to deliver real benefits for schemes, in terms of investment management and member engagement.”
Buck principal and senior investment consultant Celene Lee said there has been a sea-change in the way the industry has come to view ESG. “A few years ago some of the clients I spoke to were adamant they did not want me to discuss ESG options. Now they are coming to me and asking where they can get training in ESG.”
This regulatory shift may be creating compliance challenges for schemes at present, but Lee says it will result in better data being collated across the industry.
“Once you collect the data, people start being interested in it and this will help shape behaviour.”
Lee pointed out that the industry is now more complex and has moved away from the simple binaries of include and invest or exclude and divest. “It is not a binary but a spectrum in which companies might score well, or badly, on a whole range of measures, from carbon emissions to pollution, plastic use and fair pay policies.”
She said creating an ESG dashboard that measures these metrics can help inform investment decisions. She says this isn’t necessarily a case of divesting from huge swathes of the economy, but within certain sectors investing in firms that score better.
The fact asset managers have to supply this data will also put pressure on individual firms to improve certain metrics, she said, such as their carbon footprint and energy efficiency.
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