A couple of years ago, my habitual caution got too much for an UKSIF director and I was presented with a very charming mug saying, “the glass is always half full”.
She was right – there is good news out there, and in sustainable finance, we can look forward with some optimism. I was already writing a summary of our piece on investment consultants prepared with the AMNT and I am now broadening that somewhat. If I can cheer Daniel up a little after his article last month (year!), then I will go the whole hog: I will wash the mug and hand it on!
So, first on our report with the AMNT:
New regulations, growing societal interest and calls from scheme members are combining to require pension fund trustees to understand whether environmental, social and governance (ESG) issues are material to their investments, and if so, to take account of them.
The provision of quality advice on ESG issues by the UK investment consultant industry to its pension fund clients is thus essential. Whilst “good” trustees have always known they should consider ESG, the catalyst for the current changes was the Pensions Regulator (TPR) issuing guidance that required trustees to take into account financially material environmental, social and governance (ESG) issues after the first Law Commission report in 2014.
“Investment consultants are not living in denial.”
To help trustees meet these challenges, the UK Sustainable Investment and Finance Association (UKSIF) and the Association of Member Nominated Trustees (AMNT) worked together to secure the public commitment of 16 UK investment consultants to bring the TPR’s ESG guidance to the attention of their respective client bases.
This year we again worked together to see how the firms have met their commitments, by asking them to outline how they have reached out to their client base on ESG issues, as well as how their internal governance mechanisms are supporting the provision of ESG advice. The consultant responses were used to inform the development of recommended minimum service requirements and best practice criteria about the procurement and delivery of ESG advice. The resulting report summarises our findings. Some of the key recommendations for the minimum services consultants should provide are:
• Development of trustee beliefs on ESG, including stewardship
• Development of ESG policies or the integration of ESG considerations into existing policies. This offer to include Statement of Investment Principles revision/preparation
• Regular training programmes at trustee level on ESG issues
• Integration of ESG considerations across asset classes
For the advanced service, we suggest the inclusion of ESG into regular client publications on investment matters, and the provision of more advanced ESG advice such as climate scenario analysis and stress testing, where applicable to the consultant’s business model.I hope that by flagging these areas, other investors will see that professional advice is available in these fast developing areas. The level of public commitment undertaken by the consultants is encouraging, and we look forward to their support in ensuring that fund managers support asset owners’ ability to develop their own ESG policies, as per the Pension Regulator and, and now, Department of Work and Pensions (DWP) requirements.
Daniel thought trustees looking to fund managers for support might be a long shot. I am more optimistic. If we consider trustees who are new to this, then asking all their current advisers and agents is an obvious first step and I know the managers are getting ready. For most funds, the investment consultant is the key adviser and this report shows them moving and developing expertise – not living in a state of denial.
I think the fund managers, many of whom are of course now expert in these areas, will adopt the same approach and choose to engage as well. Since the direction of travel for the whole pensions industry is clear, I think that on balance trustees will get useful input.
I suppose I am saying that in an environment where change is coming we can hope that entities that do not help their clients will lose out. Good. Daniel referenced Red Lines voting. Well, trustees will now need to state their policies on voting rights so everyone should expect questions in that area. I have not fully digested the latest report on the Financial Reporting Council, but I doubt it will reduce trustee interest in how votes are used.
If I look more broadly in the UK, I am excited at what is coming down the line: the Financial Conduct Authority and Prudential Regulation Authority are doing further consultations which we see as “how do we?” and not “should we?”
The Government is producing a green finance strategy. There is renewed discussion on definitions and labels. All of this is matched by efforts across UK sustainable finance by UKISF members and others.
One statistic: the recent Eurosif survey shows that there are over €2 trillion of assets managed in the UK using “ESG integration”, growth of 77% since 2015. People in the sector in the UK are delivering.
I accept it is currently too slow, but progress is real. I welcome the RI story on Paris-aligned benchmarks. Directly linking capital to Paris seems a key step. There are bits of the EU action plan that have been criticised, but I think we should unequivocally welcome this aspect.
Things feel better in UK sustainable finance than at any other point I can remember – although I am a ‘newbie’.
I hope there is an English translation of the Norwegian comedy Daniel found; I’m an ex-fund manager: finance is a sitting target for comedy. I hope pension trustees can call on their investment consultants for the services the AMNT and we think they should provide, and I hope we can continue and accelerate progress.
And so I have taken a unilateral decision: I’m sending the ‘glass half full’ mug to Daniel in the hope it cheers him up as it did me!
Simon Howard is Chief Executive of UKSIF, the UK Sustainable Investment and Finance Association.