UK schemes pushing consultants at the cutting edge of ESG

Pension scheme consulting is big business in the UK. The 10 largest consultancies brought in £2.1 billion ($2.6 billion; €2.4 billion) in revenue between them in 2021 and schemes turn to them for everything from buyouts to trustee services.

While ESG services are increasingly being integrated into existing offerings, the pace and scale of requirements and voluntary action mean that the best-resourced schemes are pushing their consultants to innovate and offer more.

Consultant use can vary depending on a scheme’s size and resourcing. NEST, for instance, is mainly reliant on its in-house responsible investment team, although it has a contract with Minerva for data consultancy on voting and brought in Aon to provide climate scenario data for its TCFD reporting.

By contrast, one large corporate scheme tells Responsible Investor that, given its small internal team, support from its three advisers was “core to delivering the aims of the scheme” and “central to our approach”.

The scheme says its DB and DC advisers provide “considerable ESG support”, and it has brought in a third firm to help build, implement and track its approach to climate commitments, as well as assist with cross-scheme stewardship and other ESG activities.

Investing in teams

Consultants have been investing heavily in their ESG teams to meet demand. Mhairi Gooch, climate lead at Hymans Robertson, says the firm had been expanding its RI team, and that within the climate space it had recruited for “very specific roles”.

“It’s quite a learning curve for everyone,” Gooch admits, “with TCFD coming into it so quickly and with climate coming up the agenda in the last few years.”

Fellow consultancy LCP even finds its staff in demand for secondment to schemes. “We’ve had a number of situations where we’ve been asked if someone can be seconded to the client because they’ve got a vacancy they can’t fill,” says Claire Jones, partner and head of responsible investment.

For schemes at the cutting edge and beyond, consultants offer expanded capacity and expertise and the ability to fill in gaps. Even the largest and best-resourced teams at asset owners might need to bring in consultants to assist with more complex exercises such as scenario analysis.

For the larger schemes, says Jones, “it becomes more of a partnership”. “We try to keep one step ahead, but partnering with clients is actually a good way of pushing the boundaries of what we’re able to do.”

Jones points to nature as an example. Given the newness and complexity of reporting against the TNFD – TCFD’s biodiversity cousin – LCP would work in partnership with schemes to develop services “as and when they need them”.  While most schemes are still focusing on climate, and only looking at nature or human rights through a stewardship lens, Jones says there is interest from a handful of the largest schemes.

The corporate scheme tells RI that, given the rapid rise of nature and biodiversity as an issue, it expects services for this to be extended “without delay”, and that it expects all advisers to be developing their approaches to support clients in meeting ESG and climate commitments.

The work that its adviser is carrying out on building the scheme’s own approach to climate commitments is a new and developing service, it adds.

Gooch says that increased interest in ESG from Hymans’ clients is also pushing the development of new products and processes. The firm offers a Net Zero Journey Plan, which takes a carbon budget approach to look at historical emissions and alignment with 1.5C, and was developed in response to clients that have gone quite far with their journey.

“It’s quite lucky that we have those clients that are pushing us as well,” says Gooch. “That’s fantastic because we learn a huge amount as we go on.”

She also notes increasing interest in certain types of investment such as timberlands and renewables.

While consultants are in fierce competition, they do also collaborate on some sustainability issues via the Investment Consultants Sustainability Working Group (ICSWG).

The corporate scheme says it is highly supportive of both the concept of the group and the work it is carrying out. Jones agrees that working together is useful for areas such as responding to consultations and standardising ESG information requests to submit to asset managers.

Cost burden

The increasing need for consultant assistance is not something every scheme is happy with.

David Russell, head of responsible investment at USS, told RI last year that the UK’s mandatory TCFD reporting regulations were “a licence to print money for consultants and service providers who smaller funds will have to use to do this”.

The corporate scheme also said that the increasing breadth and depth of voluntary and regulatory commitments inevitably required the investment of additional resources.

Gooch admits that the initial costs for setting up TCFD reporting processes are “quite chunky”, while Jones notes that producing a TCFD report necessarily involves additional fees as reporting, scenario analysis and metrics are not necessarily things that trustees would have done otherwise.

Both consultants are, perhaps unsurprisingly, keen to emphasise that this is not burdensome.

Gooch argues that ongoing reporting costs will be lower after the first report, and the preparation will pay off.

“It’s a necessary piece in terms of protecting your risk and return, and it’s probably quite a small proportion of that,” she says. “Cost shouldn’t be the concern, it’s definitely going to pay off.”

Jones also notes that, for schemes under £1 billion, much of the cost is “wrapped up in business as usual, so you wouldn’t expect to see a significant incremental fee”.

For the corporate scheme, the sooner ESG and climate work is built into business as usual activities, the better the industry will be able to respond to it, and the better value it will provide.

Managing managers

Consultants also act as an influential gatekeeper between schemes and asset managers. As such, they play an important role in holding asset managers to account and pushing them on ESG issues.

Manager research forms an important part of consultant offerings, and ESG is increasingly being integrated wholesale into the process. LCP, for instance, said last year that it would strip its buy rating from any funds where the manager wasn’t a signatory to the Net Zero Asset Managers Initiative (NZAMI).

LCP’s research covers ESG integration, voting and engagement and climate change, as well as a separate section for net zero to ensure it is explicitly being covered. “Back in the day you’d have managers who got the bottom rating and say they don’t do ESG,” says Jones. “You’d never get a manager now who says they’re not doing anything on ESG.”

She acknowledges that this means more research is required to distinguish good managers from bad.

Gooch says Hymans has not taken a similar approach on NZAMI as membership of an initiative did not necessarily indicate alignment with it. The firm’s RI and research teams are fully combined, with managers subject to minimum RI and climate standards, and she says standards of best practice have been raised this year.

Hymans has previously been critical of private asset managers, claiming that the poor availability of climate data from them puts scheme compliance with TCFD regulations “in jeopardy”.

On the client side, the corporate scheme has fully integrated ESG and stewardship into its manager selection and monitoring, and this is also integrated into advice from consultants. The consultants themselves are also assessed each year on the support they give on the topic.

The scheme says many aspects of ESG activity, such as ESG integration, are built into existing provision from consultants. Where innovation is needed is in fulfilling major global commitments, such as meeting the aims of the Paris Agreement, working towards a just transition, TCFD disclosure and additional frameworks, regulations and standards.

“This has created a step change of activity, with new activities needing to be developed at speed, often ‘in real time’ as data, metrics, regulation, industry standard is coming out.”