Articles - Putting the S in ESG


The impact of climate change on the environment has risen ever higher on policy and corporate agendas in recent years, as global temperatures creep ever closer towards potentially catastrophic levels. Last year’s much-hyped COP26 summit saw governments around the world strive to go above and beyond with their ‘green’ targets and initiatives, with the UK aiming to reach net zero carbon emissions by 2050 alongside many of its international peers.

 By Pavan Bhardwaj, Trustee Director at Ross Trustees
 
 Across the business world, the UK is also leading the charge as the first G20 nation to enforce mandatory requirements for the nation’s largest companies and financial institutions to report on climate-related risks and opportunities via the Task Force on Climate-Related Financial Disclosures (TCFD).

 However, while politicians and business leaders are starting to make tangible progress on the ‘E’ in ESG, work on the ‘S’ element continues to lag behind.

 The pandemic may have proved a catalyst for conversation in this area at least. From fair treatment in the workplace to global protests against systemic racism, the last 12-18 months have pushed the issue of social responsibility further up the agenda than ever before.

 But what does this mean for the pensions industry and how can we, as professional trustees, play our part in helping to improve social governance standards to achieve a positive impact?

 Key industry challenges
 At this stage we do not believe that pension schemes necessarily need a dedicated policy on the social element of ESG, but instead a shift in mindset is required to ensure that conversations on responsible investment do not continue focus solely on climate change without regard to social and governance issues.

 While there has been an increase in awareness around social issues on many boards, there are key challenges in addressing both social and governance issues, not least the difficulty in neatly defining and quantifying the criteria in question.

 This makes it more difficult for already stretched trustees to assess relevant progress in contrast to climate change-related goals which can be much easier to define.

 There is also the question of the responsiveness of underlying companies to challenge and the steps that trustees are willing to take in response, as demonstrated last year by Legal and General Investment Management’s decision to cease seeking feedback on executive pay after concluding that their views were generally being disregarded.

 Nonetheless, most will agree that the issues encapsulated within the social element of ESG, such as fair employment practices and maintenance of sustainable supply chains, are increasingly influencing access to and the price of capital and are, therefore, financially material.

 As a result, we would not be surprised if we saw more boards moving towards specific policies in the future.

 The role of trustees
 For the time being, however, trustees can still play a part in delivering against the ‘S’ in broader ESG policies by engaging proactively with advisers and asset managers to ensure relevant risks are being appropriately managed.

 At Ross Trustees, for example, we seek to work closely with managers and advisers, many of whom have already introduced questionnaires on key issues to ensure managers are delivering in this area, and we expect this approach to become more widespread going forward.

 We are also developing our own ESG policy which we will apply across our client base to ensure we are holding ourselves to the highest possible standards and maintaining a consistent approach in this regard too.

 At a time where the increasing number of regulatory requirements are already taking up a significant amount of trustee time, a professional trustee can also support by working collaboratively with all partners to build consensus and develop a shared vision around social impact, bringing in fresh and innovative ideas to help boards meet strategic aims in this regard, as well as ensuring diversity and inclusivity on the scheme itself to help introduce alternative perspectives and viewpoints.

 While there is clearly a way to go to improve the ‘S’ in ESG, we are confident the pensions industry, with the support of expert trustees, will be core to the delivery of this goal over the coming months and years.
  

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