I have completed a couple of projects with pension funds in recent months looking at Environment, Social and Governance (ESG) strategies. These are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Advisors have been developing ESG ratings, which should make it easier for pension fund managers and trustees who don’t have an in-house capacity to assess investment funds. However, these are very broad and, in my experience, often overly generous.
There are also a growing number of initiatives that seek to align investments with the Paris agreement. This committed most of the world to limit global heating to 1.5C above pre-industrial levels, even if progress has been decidedly mixed. The latest includes Legal and General Investment Management, Fidelity International, Schroders, Wellington Management, Axa Investment Managers and M&G. They have signed up to a pledge that they will aim for all companies in their portfolios to be decarbonised by 2050 or earlier. They have also set interim 2030 targets to decarbonise their portfolios.
Some are rightly sceptical about these initiatives. As the Reclaim Finance campaign group, said: “We seem to have a lot of platforms and not enough trains. Without question, what we do need is a truckload more ambition from investors. Will this group deliver that? It seems unlikely, given that there is no collective commitment to exclude coal or to halt the expansion of oil and gas, both seriously at odds with the stated goal of this coalition.”
Scepticism is also a feature of an excellent report by the Association of Member Nominated Trustees (AMNT), which says that pension funds are often blocked by fund managers, who not only ignore the wishes of their clients but often take contrary positions. The report sets out practical solutions that allow pension schemes to meet their stewardship obligations.
The report’s author is Professor Iain Clacher, who also wrote a ground-breaking paper on reforming Scottish local government pension funds. His main conclusions are:
· The barriers presented to split voting in pooled funds are not insurmountable, especially as some fund managers have already been doing this for some clients.
· There needs to be a simplification of the voting chain and investment in technology to enable the effective stewardship of pension fund investments for the long run.
· Asset owners need to be more proactive in their stewardship approach, but they cannot do so without the support of their fund managers and investment consultants. So far, this has been sadly lacking.
· In the short term, asset owners should develop their own voting policies on ESG issues they deem to be financially material, as well as benchmark their fund managers’ voting policies against their own, and hold them to account for it accordingly. If their investment consultants do not support them in this endeavour, they should consider changing advisors.
· Fund managers should at a minimum report against client voting policies on a comply or explain basis so that asset owners can make more informed decisions.
In my experience, this paper is spot on. Too many reports to trustees are either too complicated or oversimplified greenwash. These recommendations are an important step in the right direction.