By George Latham
Fifteen or 20 years ago in many of the companies we analysed, corporate responsibility was a part of the public relations team. Such ‘CR’ was typically limited to philanthropic activity such as building playgrounds or charitable donations, and was separate from the core business activity. Little wonder it was difficult to persuade the financial community that this had much to do with investing.
Today, the picture could not be more different. Increasingly, the head of corporate sustainability or even the chief sustainability officer has a strategic position, closer to the chief executive’s office. Progressive chief executives have recognised the issues addressed under the headings of environmental, social and governance (ESG) as critical to long-term commercial success. These long term ESG themes offer an opportunity for value creation if they are aligned with overall business strategy and represent a threat to the business if they are ignored.
In businesses where sustainability is seen as a boardroom issue, would it not be logical that the company’s pension fund should take the same approach? This was the question we posed to a roundtable of some of the leading companies in the UK. The invitation was addressed jointly to corporate sustainability and pension team executives from 10 FTSE 100 companies. These executives were encouraged to come in pairs to two roundtables held at WHEB earlier this year and are continuing to meet to explore the issues raised and share their own experiences.
A sensible way of aligning business strategy with ESG is to frame the debate in terms of risk management. Pension funds are typically interested in the steps the corporate sponsor is taking to protect long-term cash flow from the business, and the sponsor has a keen interest in the way the pension fund approaches issues of long-term exposure and volatility. This discussion is no longer seen as a threat to the independence of the pension scheme from the corporate sponsor, which was an early concern, but rather an opportunity to understand better the other’s perspective and even to leverage expertise and insights. Given that pension schemes do not compete directly with each other, this is also an area where pension funds benefit from collaboration, particularly at a time when they are challenged by thin resources, which makes it difficult to channel energy away from near term and operational issues.
Many of those attending WHEB’s roundtable highlighted how engaged staff are with their corporate stance on sustainability, but remain frustrated in their ability to continue this thinking through to their pension fund. One sustainability executive commented on his own experience: “I nearly hit the roof when I found out my defined contribution (DC) pension’s largest stock holding was in Exxon, [and] we’re not given any sustainable options.”
A common frustration for many scheme trustees, particularly in a DC context, is the challenge of engaging staff on pension issues. At a time when financial services and investment management are held in low regard[i], perhaps adopting a more integrated and aligned approach to sustainability within pension management represents an opportunity not just to help manage investment risk, but also to engage better with employees. Several corporate pension funds are now thinking this way and will be sharing their experiences at our next roundtable at the end of the year.
George Latham is a managing partner at WHEB Listed Equities
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