UK’s biggest schemes increasingly demanding RI credentials from fund managers – FairPensions

Lobby group’s 2009 RI report says ESG compliance becoming more necessary for mandate hires.

Research we have carried out at FairPensions, the UK-based lobby group, has found evidence of a trend among large UK pension schemes to be more assertive with fund managers about their responsible investment (RI) credentials, notably when hiring for investment mandates. This suggests that the case for RI is gaining ground. It also raises questions about how fund managers are responding to evolving client demand. The report (“Responsible pensions? UK occupational pension schemes’ responsible investment performance 2009”) is the result of a four-month survey of the UK’s 30 largest schemes, together worth an estimated £351bn and widely seen as industry trendsetters. Twenty of these actively participated, and limited information was available for another 5. Of those who submitted information, 55% said a fund manager’s ability to comply with the pension plan’s ESG policy was a pre-requisite for being hired. A further 15% said they are planning to examine fund managers’ ESG engagement capabilities in future appointments. Some funds are also using more specific ESG criteria when selecting managers: 20% saidmembership of the UNPRI was a “significant hiring criterion”, a further 15% plan to make it one, and 35% said they considered a fund manager’s capacity to assess and act on risks and opportunities relating to climate change as important for appointment. However, those pension schemes that do consider fund managers’ ESG performance are likely to see very diverse results. FairPensions research on this subject carried out in November 2008 found wide disparity in resources and activity between the fund managers surveyed. The range of scores we applied to managers’ ESG performance ranged from 5% to 100%! We believe the phenomenon of pension schemes assessing fund managers’ responsible investment credentials is likely to become more common as awareness of the potential impact of ESG issues grows; especially surrounding the likely impact of climate change on long-term investment. And although the trend towards asking about fund managers’ UNPRI signatory status is a positive one, we think it should not be relied upon. Signatory fund managers tend to perform better on RI, but there are exceptions. There is

a danger that fund managers seeking to win business may treat the UNPRI as a substitute for action. In-depth scrutiny of fund managers by potential clients is, of course, the best way to ensure they practice what they preach. While the report revealed an apparent growth in RI practices, it also found some worrying gaps. All schemes that submitted information have produced statements that recognise the potential impact of ESG issues on financial performance. But a third apparently do not apply these when instructing or receiving reports from their fund managers, and almost half employ no internal or external personnel responsible for ESG issues. Pension schemes’ transparency is also variable: almost half of the schemes surveyed do not publicly disclose their largest investments, and two thirds don’t disclose their voting record. This raises the prospect of the UK government making voting disclosure mandatory, whichunder the 2006 Companies Act it has the power to do. The research does not present a picture of a pension sector that has wholeheartedly accepted and implemented RI, but it does show that action is being taken by a vanguard of large schemes. This trend is likely to be sustained because it is becoming increasingly obvious to long-term asset owners that some ‘non-financial’ issues need to be acted upon before they become financial issues (climate change being the obvious example). Governments are also increasing the pressure on institutional investors to become more responsible and accountable. Hopefully the asset management industry will recognise that these factors are increasingly shaping the demands of their clients and anticipate them. FairPensions believes this could create a virtuous circle to rebuild trust in both pension funds and fund managers and help lift us out of the current crisis.
Link to FairPensions report