Investment - Articles - Integration not exclusion for ESG


The Department for Work and Pensions (DWP) issued a response to its consultation on clarifying and strengthening trustees’ investment duties in September 2018. The focus of the consultation was on the expectations upon trustees to take account of financially material risks within their investment strategies.

 By Peter Daniels, FIA, Associate at Barnett Waddingham

 Whilst factors such as interest rates, equity risk, longevity etc. are widely considered, the consultation explicitly references those risks associated with Environmental, Social and Governance (ESG) factors.

 Myth busting
 ESG investing is driven by the desire to improve returns and manage risk by understanding the key factors which influence the long-term sustainability of a company. It is not about socially responsible investing or the exclusion of stocks, such as tobacco companies, on ethical grounds; it is about ensuring that the analysis and decision making by your investment managers take into account the risks and opportunities that are presented by ESG factors.

 The key outcomes which will impact trustees of both DB and DC pension schemes are that:

 1. From 1 October 2019, the Statement of Investment Principles (SIP) should state the trustees’ policy in relation to:
 financially material considerations over a suitably considered time horizon, including those arising from ESG considerations, including climate change
 stewardship of the investments, including engagement with investee firms and exercise of voting rights, and, for DC schemes, how this applies specifically to the default strategy
 2. The DC default strategy should reflect how the trustees take account of financially material considerations, including ESG matters, and the SIP should be published on a website (for DC schemes)
 3. The Trustees may choose to adopt an optional policy on non-financial factors, including not only members’ ethical concerns, but also social and environmental impact matters and quality of life considerations
 This optional requirement replaces the original proposal for Trustees to take into account of members’ views in relation to matters set out in the SIP.
 4. From 1 October 2020, trustees of DC schemes should prepare an implementation report setting out how they acted on the principles set out in the SIP and explaining any changes to those principles. This report should be included in the annual report and should be referred to in the link to the SIP that must be included in members’ annual benefit statements.

 Our view
 We believe this is a positive step for pension scheme trustees and the industry as a whole:

 1. We believe the evidence is clear that ESG factors are key drivers for the long-term sustainability of companies. Companies that that have good ESG characteristics are better able to mitigate financial risks related to ESG factors such as climate change, labour disputes, cyber security and bribery. On the flip side they are also better able to take advantage of ESG-related opportunities, such as environmental innovation, population and demographics and food security.

 2. The consultation outcome helps to place the emphasis of the ESG policy on risk management rather than ethical considerations. Trustees will be clearer on what is expected from them as long-term investors. It spells the end of a one-line comment in the SIP to satisfy investment regulations – this time around, expectations are most certainly different.

 How should trustees respond?
 We expect the majority of trustees to actively consider in detail, potentially for the first time, their approach to ESG factors within their investment strategy.   

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