Sustainability targets and active stewardship will be key in integrating tighter standards on ESG into portfolios argues Charlene Cranny, communications and campaigns director of the UK Sustainable Investment & Finance Association (UKSIF).
When I wrote almost two years ago (Not a nice to do: sustainable investing and the law, April 2019), the message was simply for UK pension trustees to understand the legal obligation to consider financially material environmental, social and governance (ESG) factors when investing. Regulation has evolved since then.
The Department for Work & Pensions (DWP) offered clarity on the significance of ESG risk in 2018. They updated regulation to ensure pension schemes state their policy on managing ESG risk in their statement of investment principles (SIP) and publish it on a website. Since October 2020, defined contribution (DC) schemes have had to state how they have implemented the policy.
A January 2020 UKSIF review of the SIPs found that policies are “vague and non-committal, and many have not even published their policies – despite their legal obligation to do so”. UKSIF recommended, amongst other things, a central SIP register to allow schemes’ investment policies to be scrutinised. The DWP has agreed.
Voting is being democratised
The DWP ‘ESG regulations’ also introduced the requirement for schemes to disclose a policy on stewardship and how they exercise voting rights.
To support smaller schemes finding it difficult to use their voice, the Association of Member Nominated Trustees (AMNT) made some recommendations to help bring “shareholder voting into the 21st century”.
This led to the pensions minister setting up a working group to explore barriers to voting, led by Simon Howard, an ex-UKSIF CEO. At the saver level, Tumelo provides schemes with the technology needed to enable individuals to cast a vote. Many forces are helping to democratise and normalise voting. The industry must prepare for this too.
Reporting seeks double materiality
After slow take-up of the 2015 recommendations put forward by the Task Force on Climate-related Financial Disclosures (TCFD) the UK has announced its intention to make the disclosures mandatory across the economy by 2025. The UK is also likely to align with new EU sustainability reporting standards which embed ‘double materiality’ – the requirement to seek financial and sustainability outcomes. An approach also being considered by the IFRS (International Financial Reporting Standards).
Tech innovation will be needed to collect all this new data easily and quickly “not on how much less bad companies are, but on how much more good they are”, as writer and consultant B. Lorraine Smith put it.
Regenerative capitalism is the goal
ESG risk management without sustainability targets and stewardship does not help to transition the economy to one that is more resilient or regenerative. Regenerative capitalism is what think tank Volans describes as “economic activity [that] works in the service of a just and inclusive society while restoring and protecting ecosystems”.
It is the essential next phase if we are to restore global health and long-term prosperity for savers and the whole of society. We are en route and UKSIF will soon lay out its vision to support UK industry stay ahead. We cannot delay giving proper attention to ESG and sustainability plans any longer. So let us know how we can help.