With ESG rapidly rising up the agenda for UK pension schemes, their often overstretched trustee boards have been grappling with how to ensure it gets enough time on agendas and how to educate themselves on fast-moving developments.
Janice Turner, co-chair of the Association of Member Nominated Trustees (AMNT), told Responsible Investor that the proportion of trustee time taken up by ESG matters has been increasing every year, especially due to enhanced regulatory requirements.
“I would assume that ESG is an agenda item at every board meeting and every investment subcommittee at most schemes,” she said. “That’s not something that was necessarily the case pre-2019.”
The capacity of pension funds and trustees to consider ESG can vary greatly. Some schemes have large in-house investment teams alongside trustee boards, while the smallest schemes may have a single sole trustee. The best-resourced schemes will even have their own ESG committees separate from the investment committee.
Tegs Harding, trustee director and head of sustainability at professional trustee firm Independent Governance Group (IGG), said having a separate ESG committee makes sense, as there is “simply not enough time on investment committees to carve out time to do ESG properly”.
“It’s really hard to dedicate enough time to all the aspects and you end up just treating it as a tick-box exercise. You essentially only have time to do compliance – so if you want to do it properly, it’s got to be separate.”
Monique Mathys-Graaff, head of sustainability solutions at Willis Towers Watson, said the consultancy contributes more to trustee education at mid-size schemes where investment teams are more overstretched, whereas at larger schemes it will supplement work done by in-house specialists.
Schemes also vary in how advanced they are in ESG integration and understanding, she said. Some may be on their third iteration of TCFD reporting and beginning to understand climate metrics, while others are “at a very different stage in terms of understanding, the capacity to absorb training quickly and the ability to implement it”.
These slower schemes have found it difficult to improve skills and carry out training to keep up with the pace of what is required. As such, there is still a wide range of understanding and levels of comfort with various sustainability requirements.
Across the spectrum, schemes are finding it difficult to make space for ESG, Mathys-Graaff added.
Time allocated in trustee meetings to consider ESG issues has generally not increased, she said. “Trustees are trying to meet and be sensitive to their beneficiaries, to what the DWP and other related regulations require, but their own time and capacity hasn’t increased.”
Sarah Marshall, an independent trustee at professional trustee firm Pi Trustees, said ESG has crept on to scheme agendas quite quickly, but given the breadth of the topic it is a challenge to balance allocating appropriate time for ESG against everything else required for a scheme.
While ESG has entered the mainstream and is generally well integrated in mandates and consultant offerings, it rarely features in tenders from schemes for professional trustee services, Marshall noted.
Some trustees also warn about the lack of ESG integration into initial training tools. Trustees who join a board must complete The Pensions Regulator’s (TPR) Trustee Toolkit within six months, but Turner said it contains “precious little” on ESG and climate change.
Harding agreed that there is “not even nearly” enough focus on ESG in either the toolkit or accreditation on offer from the Association of Professional Pension Trustees (APPT) – although Marshall noted that APPT accreditation requires continuous personal development, which can include ESG, and the association has an ESG subcommittee which is working on improving available content.
Similarly, a call for evidence by the Department for Work and Pensions and the UK Treasury on trustee skills and capability, which closed at the start of September, does not mention ESG or climate.
A spokesperson for TPR said the regulator had updated the toolkit to reference ESG and climate change in its modules on investment and trustee duties.
“We will continue to keep the toolkit’s content under review as we learn from our ESG initiative, TCFD reports published in 2023/24 and the government’s review of TCFD reporting regulations,” the spokesperson added.
Education in focus
For schemes looking to provide trustees with a basic understanding of ESG issues and education on new and complex topics, one of the main sources is their investment consultants.
One scheme that Marshall is a trustee for invited an asset manager to come in and give an overview of what it was doing on ESG for funds the scheme had invested in. She said consultants are better placed to offer bespoke education.
Mathys-Graaff said WTW had seen demand for bespoke training on diverse topics including nature and TNFD reporting, DE&I, and the Just Transition in emerging markets, as well as very high demand for training on engagement and voting. For instance, the consultancy held a stewardship and engagement day alongside EOS at Federated Hermes.
WTW’s training programme for trustees on ESG starts with governance, regulatory requirements, and the relation of climate change to fiduciary duty and its impact on asset values. It moves on to risk management and physical and transition risk, along with deep dives into climate metrics and TCFD reporting.
For professional trustees who sit on multiple boards, learning on topics such as TCFD can be applied across schemes.
“Some of my colleagues have got really big schemes,” said Marshall. “We’re sharing the lessons they’re learning and picking up the knowledge from things they’re going into in depth, so I can come to the table and share with my fellow trustees or client if I’m the sole trustee.
“This kind of knowledge sharing makes the process a lot more efficient.”
Harding sits on eight schemes, as well as representing the Diageo pension scheme on the Occupational Pensions Stewardship Council. She said internal training among professional trustees is important and was instrumental in setting up a programme at IGG. Trustees at the firm are now given two full days of ESG training.
Marshall agreed on the importance of internal training. She added that being on multiple scheme boards allows professional trustees to experience training from a variety of consultants.
There are also opportunities for self-education. The AMNT runs webinars on ESG, and other industry groups such at the PLSA hold training courses. Some industry publications will also give free subscriptions to scheme trustees.
However, while professional trustees have access to both internal training programmes and learning across the schemes they are appointed to, the situation is entirely different for the lay trustees who make up the majority of boards.
“It’s a bit of a rubbish job at the moment,” said Harding. “There’s quite a lot of upskilling being put on them that they’re expected to do for free.”
Turner said some schemes have their own in-house training and others will pay for external training, but the AMNT has also seen cases where the sponsor has refused to pay for training for trustees. “We think that’s an outrageous situation for trustees to be put in to.”
As representatives either of the employer or scheme members, lay trustees provide a different perspective from the financial services industry, and Turner said it is “very important” that they continue to engage actively on the issue.
The AMNT was one of the first movers in the push for pension schemes to take control of their own votes, publishing a “red lines” voting policy for schemes in late 2015. “It certainly wasn’t the fund managers or scheme advisers that were pushing for this,” Turner said.
Even on the consultant side, Mathys-Graaff acknowledged the importance of lay trustees. They can bring an important voice from other stakeholders, she said – for instance, member-nominated trustees ensured that schemes were considering the cost-of-living crisis on their social agendas much faster than otherwise.
Despite time constraints and education concerns, Harding said schemes should be making enough time to consider ESG for a number of reasons.
“It’s just absolutely fundamental to somebody who’s making investment decisions on behalf of other people’s DC pension pots right now,” she said. “The better educated our colleagues are, the less of a fee hit our clients are going to take, because we know when we’re being fobbed off.”