In May this year, UK pensions pool Brunel Pensions Partnership produced one of the first RI reports to explicitly align with the country’s latest Stewardship Code.
With Brunel having formed in July 2017, bringing together around £30bn (€33.2bn) from 10 “likeminded” pension funds – including sustainable investment leader the Environment Agency Pension Fund – eyes have been on Brunel to see what pooling means for environmental and social issues.
When the Financial Reporting Council (FRC) introduced what Responsible Investor then described as a “de facto ESG Code” in late 2019, Brunel’s Chief RI Officer Faith Ward saw the chance to align with emerging best practice on ESG. “We're still quite young as an organisation and this is our first responsible investment report,” she says. “We’re a year ahead of the deadline for that because we wanted to learn from it.”
According to the code’s most recent iteration, all signatories must produce an outcomes report. “The nature of it is that it's all about outcomes and wanting to try to show the real world impacts,” Ward says.
The problem with data
Ward says there were challenges with some of the data and analysis needed to try and meet the different reporting needs. “You might be engaging but trying to demonstrate what the engagement is delivering can be quite difficult. We've been looking at how we build on that, looking at the data itself, especially around social and workforce related matters.”
In Ward’s view, the new code is pushing investors to identify where the gaps are for reporting – and to act on it.
“The FRC emphasised the fact that stewardship should be across all asset classes – and yet the disclosure in a coherent and consistent way in private markets is quite challenging,” she says. ”There aren’t quite the same data sets available. We've seen a huge improvement in private market reporting in terms of sharing stuff, but not in a consistent fashion.”
At the RI DigiFest online event this summer Ward called on fellow investors to work collaboratively on stimulating private market data, and says she got a “positive response”.
“We're mobilising with some other investors around trying to fill that gap now, focusing our attention on engaging with private managers to try and bring a more coherent picture,” she says. “I would say that was stimulated by the new FRC code – to make us think, ah right, that’s what I want to be able to say, and stimulate the whole cycle in that way.”
It’s still early days, but the group is made up primarily of UK investors, and plans to invite and draw on expertise from some European pension funds.
Ward says the group will be focusing on how to get some of the metrics in a consistent way. “What we don't want to do is be asking a multitude of different questions from every single asset owner to the whole range of GPs [General Partners]. We don't want to create a reporting burden."
Getting introspective on RI
Ward says Brunel has also turned the RI lens inside. “Rather than only thinking about the assets we invest in, we’re asking, how do we manage our own human capital? What's our own transparency? What's our attitude on racial equality, or the gender pay gap?”
The new code has helped in this regard, she says. “It’s stimulated a recognition that what we're doing externally, we need to do internally. We are, for example, an employer that has some very strong values around its people, and we do some great stuff, but can we actually evidence it in a reporting sense? “And that stance is of course extended to Brunel’s managers. “We also shine a lot of that RI lens on the companies that are managing our assets – and we’re trying to ramp that up. If you get that right, I think that helps with what they're purchasing.”
She says RI is integrated “very deeply” into manager selection and mandate design. “We say if you want to work with us, this is our expectation – if you come along and don't meet it, it's not really in either of our interests if we're not on the same page.”
“We don't prescribe how they achieve it – we say, this is where you need to be, these are the expectations on you. How are you going to deliver them?”
A tough stance on climate
Brunel hit headlines for its hard line on managers back in January, when it called the finance sector “not fit for purpose” for addressing climate change and threatened to sack asset managers failing to act on climate issues. That was part of its Climate Change Policy, which, in Brunel CEO’s Laura Chappel’s words, is the “most ambitious climate policy of any major UK asset owner, detailing a five-point plan to build a financial system fit for a carbon-zero future”.
Ward says Brunel has reached “huge levels of transparency” around climate with this report, as well as its dedicated carbon metrics report – but that hasn’t been without its drawbacks.
“It’s a double-edged sword,” she says. “The transparency has been welcomed, but also used by some to set out what they thought were deficiencies. But I think that’s because we just have a different opinion as to how to bring about change.
“Obviously, we've come under a lot of pressure from the divestment campaign, and yet we think engaging is more effective.”
In the context of working alongside Brunel’s “shareholder” pension funds, which in some cases were less well-resourced for, and well-versed, in RI and climate capabilities, Ward says the PRI's inevitable policy response work has been helpful in bringing shareholders up to speed. ”It’s positioned with a very investment lens, but it's actually very accessible to pension fund trustees.”
“People say, what are the three things you need to do, and I think IPR, TPI and TCFD – which is obviously a horrendous list of acronyms. And they're all freely accessible, which I think is incredibly important because so much has a price tag attached to it.”
[Editor’s note: that’s the Inevitable Policy Response, Transition Pathway Initiative and Task Force on Climate-Related Financial Disclosures.]
As Responsible Investor wrote back in 2017 that the Environment Agency Pension Fund had said Brunel could ultimately consider selective disinvestment of carbon intensive companies. Ward says that’s still relevant to their thinking.
In the report, Brunel speaks about an example of using data from the TPI – the asset owner-led effort to assess the transition-readiness of carbon intensive sectors, which Ward co-chairs alongside the Church’s Adam Matthews – to engage with asset managers that had real implications for asset allocation. When it reviewed one of its global equity portfolios, two holdings were exposed to extractive revenues. The firms were “quite different in their strategic approaches to climate change” – the first coming in at TPI Level 4 (strategic assessment) and the second at Level 2 (building capacity).
“Using the insights from our analysis and from TPI, we engaged with the investment manager who concluded that Company 2 no longer fell within their investment thesis (where exposed to extractive revenues, companies should evidence of strong transition objectives) and therefore should no longer be held within the proposed portfolio,” the report says.
Wards adds that 2022 will be the next key moment for asset reallocation on climate issues, when Brunel will assess the effectiveness of its climate policy in a “Climate Stocktake”.
“We’ll use tools like TPI to actually analyse whether these companies are really in the right direction of travel – and that will impact across our investment universe.”