‘Where do people think electricity comes from?’ Trustees’ views show challenge of decarbonisation

UK pension funds run the risk of legal, administrative and governance difficulties because of “the current levels of low understanding among trustees” when it comes to ESG, according to a new report from consultancy Redington and the Pensions Policy Institute.

Growing regulatory momentum in the UK around sustainable finance – which has culminated in a recent legal change for trustees of large pension schemes [link] and a likely expansion to cover contract-based schemes in 2019 – means “pension schemes who do not start to integrate ESG consideration into their investment strategy could face legal difficulties as a result of not complying with regulations, higher admin and legal costs, and potentially reduced returns in the future as a result of not taking financially material risks into account”.

The report is based on both published and anonymous interviews with pension scheme stakeholders. Sentiment towards responsible investment varies, but the report highlighted the inadequate levels of understanding by many trustees in the UK. While some pointed out the risk mitigation benefits of ESG integration, others reportedly see it as “a distraction from the goal of delivering long-term returns”, “just for hippies” and “wishy washy”.

One defined benefit trustee is recorded as saying: “The attitude towards carbon is esoteric and aspirational. You need it for cars and planes etc. You can’t switch investment from carbon till technology advances.“The whole issue is silly – where do people think electricity comes from?”

Poor understanding on the part of trustees could leave some schemes at risk of having to adjust to the new legal requirements at the last minute, or not at all. “Trustees and IGCs [independent governance committees] would benefit from more concrete guidance regarding how to assess and implement ESG factors”, the authors recommend.

However, the report points out, there are other major challenges for pension schemes trying to incorporate ESG into strategies currently – especially for small schemes and those using asset managers.

“One of the main barriers to ESG considerations is the level of involvement that providers of pension schemes have with investment decisions”, the report says, pointing out that almost all schemes invest in pooled and third-party vehicles, and so individual leadership on ESG is often difficult to implement into investment strategies.

“Some trustees and IGCs report that the quality of asset manager reporting is variable and that some trustees and IGCs may not be furnished with sufficient evidence of an asset manager’s ESG process to comply with future regulation”, it continues, calling for better standardisation of reporting from investment managers to trustees and IGCs. Link