Claire Curtin, head of ESG at the Pension Protection Fund, and member of the Pensions Climate Risk Industry Group
The UK pensions sector plays a significant and unique role in our society. Not only must it safeguard and grow the pension savings belonging to millions of UK workers, but collectively, as one of the world’s largest investors, it also has the obligation to invest its £1.6trn in assets responsibly.
With the Department for Work and Pensions’ enhanced regulations coming into force last year, the UK has demonstrated leadership in directing UK pension schemes to explicitly consider material environmental, social and governance (ESG) risks, including climate change. In practice though, there are a plethora of issues for asset owners delivering on these requirements. While it is clear that asset owners can be the driving force for further ESG integration and adoption, we should acknowledge that this isn’t something that can happen overnight.
As a key investment vehicle choice for many schemes, trustees who invest in pooled or commingled funds especially struggle to meet their ESG requirements because of several roadblocks. Trustees are often told by fund managers that they are unable to offer bespoke voting policies or direct shareholder votes, offer fundspecific reporting and convey trustee expectations through fund terms and investment restrictions. There is also the issue that fund managers, depending on their domicile, are subject to differing regulations and interpretations of fiduciary duty.
There is also an issue in the breadth of products available to match trustees’ nuanced beliefs relating to ESG, as well as sufficient liquidity in these products. Currently, ‘ESG labelled’ products tend to exclude such a range of activities that it limits the investment universe materially which ultimately could affect the expected return profile or overall characteristics of the fund.
Trustees therefore often find themselves having to compromise between investing in an ‘ESG labelled’ product which may avoid investments in lucrative products they have no issue in investing in, or investing in a mainstream fund where they will need to accept that their ESG expectations cannot be met.
Another significant challenge faced by trustees’ is the lack of internal resource and budget constraints required in order to digest ESG data. At present, the level of fund-specific reporting provided by managers is sparse; often asset owners are told that ESG reporting is only available on ‘ESG labelled’ funds, so if trustees still wish to have a thorough oversight of nonESG labelled portfolios in relation to ESG risks and opportunities, they currently need to monitor these portfolios themselves. This requires extensive resources in terms of time, experience and costs which many schemes are not set-up to do. With the current focus on short-term reporting and performance, it is difficult for trustees and fund managers to look to the future and make costly pre-emptive steps as addressed in Mark Carney’s ‘Tragedy of the Horizons’ speech. However, the UK pensions sector collectively has the ability, as such a significant investor, to push the fund management industry for solutions which will allow their assets to be invested responsibly.