4 steps for pension funds
Pension funds are under pressure to “do something” about ESG in a way they have never previously been. The Government’s Environmental Audit Committee recently wrote to the largest in the UK asking what they were doing on climate risk. And the Department of Work and Pensions is now consulting on changes to the Investment Regulations which will, for the first time, seek to formalise fiduciary duties and member views on environmental, social and governance issues. Meanwhile the UK’s Financial Reporting Council is about to revisit the Stewardship Code, which puts obligations on asset owners to act as good stewards of their investments
At Arkadiko Partners we are often asked what pension fund trustees should be thinking about and doing now to ensure they are not caught out by the rapid pace of change today. While some funds are well ahead and have had many years of experience in responsible investing and ESG, it is also clear that the majority are confused and looking for guidance. So here is a very quick four step guide to getting started.
Firstly we always spend time discussing purpose with the organisations we work with and this is a great place to start. Purpose can sound a bit faddy but actually we all need to know what we are here to do.
Perhaps it also sounds a bit obvious. Surely a pension fund exists to pay pensions? Well yes but is that it? What if, in prioritising the paying of pensions, your investments inadvertently caused environmental damage, or were involved in human rights abuses? There are companies commonly included in pension fund portfolios that condone bribery, dodge tax, damage peoples’ health or that believe women do not have a place in the boardroom.
As a fund, you need to know what your overarching principles are, and also what activities or behaviours are non-negotiable in terms of your investments. For some, such as The Environment Agency, now part of the Brunel Pensions Partnership, this is more obvious than for others but there are some assumptions we can make around what is acceptable and what isn’t.
Once you have a high-level agreement within your organisation then step to is to start thinking about what that means for investment decision making. The principles need to link through to your practical actions and your investments should be aligned with your purpose, otherwise they are just words. They need to be practically implementable.
The third step is to develop your position on voting and engagement. If, as in the case of the majority of pension funds, assets are managed externally then this question is one for your fund managers. You need to think about what conversations you should be having with those external managers and what your want them to be doing on your behalf. What will you do if they are not doing it? Having a clear system for monitoring manager actions is crucial.
And finally, consider how you are going to report to your beneficiaries on what you are doing in relation to responsible investment. Member reports needs to be clear, coherent and convincing and set out how you are acting on their behalf. These should also be aligned with your purpose so that your overall strategy in this area seems coordinated and well-thought through which of course, if you’ve followed the steps outlined above, it will be.
