Pension fund trustees are not required to be experts on climate change or other environmental, social and governance factors, despite new ESG regulations proposed to come into force, the UK Sustainable Investment and Finance Association CEO UK, Simon Howard, has said.
Acting as a guest commentator for UBS’ Pension Fund Indicators 2018, Howard referred to proposed new regulation scheduled to take effect in October 2019 in which trustees of all large defined benefit pension schemes will have to state “how they take account of financially material considerations”, which includes, but is not limited to those arising from ESG considerations including climate change.
“This is a significant change. Whilst I suppose the language would allow a body of trustees to say ‘we don’t think climate change is financially material’, the tone of the regulation will make that rare. The attitude of the trustees, fund managers and lawyers in the UKSIF network is that ‘ESG considerations including climate change’ must now be considered,” Howard said.
In addition, he noted that the Financial Conduct Authority will be consulting on similar changes for defined contribution schemes in early 2019. Howard, however, has provided reassurance to trustees not to be worried about the changes.
“You are not expected to be an expert in climate change, in waste recycling, in employment conditions in emerging economies or in the merits of British corporate governance as opposed to German. The key thing is simply to acknowledge these new factors and try to put in place governance and management arrangements to ensure they are addressed,” he said.
For example, with regards to governance, Howard said trustees should formally consider the issues and how the various factors will affect their scheme. “Remember that they will affect some scheme sponsors as well since some business models will be affected by climate change or evolving societal attitudes to issues such as paying tax or employing child-labour.”
Howard recommended that trustees ask some advisers (fund managers, investment consultants) for a briefing and ask them what they think is important. He said it is good to put the issues on a risk register to ensure they are regularly reviewed.
He also warned of some immediate work that trustees will need to undertake, as if the planned changes do come into force then trustees will need to revise their statement of investment principles before October 2019.
“If you have just reviewed your SIP then this is new work. You can describe your approach to members, and in conjunction with that, you should outline to your service providers what your requirements are. You may need some new reporting; although many fund managers already cover ESG the laggards won’t, make it clear they need to change,” he said.
In addition, Howard advised trustees to review mandates, and if they have segregated mandates, then these factors should be taken into consideration as they review and make appointments. “You are paying for a bespoke service so you can consider setting rules and targets for carbon exposure and other factors, and again request for the reports you require.”
Finally, he stated that trustees can review their managers’ approach to voting and engagement and communicate their views.
“Many of these steps can be taken by owners invested in pooled or passive funds but they will need some flexing. Investors in pooled funds will not get a bespoke service but they can certainly ask their managers and advisors how ESG and climate risks are being considered, and seek assurance that they are integral to the managers' approach.”