Investment consultant support to trustees on ESG ‘generally poor’

Support for trustees from investment consultants is “generally poor” when it comes to the topic of environmental, social and governance (ESG) issues, according to Dalriada Trustees senior trustee representative Vassos Vassou.

Writing in the July/August issue of Pensions Age, Vassou raised several concerns relating to the way ESG issues are handled by trustees and investment consultants and asset managers.

Vassou explained that upcoming changes, such as the need for trustees to take ESG consideration into account from 1 October 2019 in their pension scheme’s Statement of Investment Principles (SIP), and the need for trustees to report on how they will comply with sustainable investing from 1 October 2020, mean that the schemes will need a close relationship with their asset managers and investment consultants to help them.

“As trustees we own the scheme assets. We have an obligation to provide effective stewardship and act responsibly on behalf of our members. This covers voting at company meetings and engagement with company management when required. We can influence corporate behaviours by investing in businesses with high ESG standards and disinvesting in those with low ESG ratings. In practice, this is likely to mean that we will need a close relationship with investment consultants who will help us with this work and with investment managers who are moving the money around on our behalf,” he said.

However, he believes that too many trustees are “not yet fully focused on ESG” and the support they do receive from investment consultants is “generally poor”.

“Some sceptical voices on trustee boards say that ‘we can’t do anything about climate change’, ‘we don’t really know what members want’, ‘we have passive investments so ESG doesn’t apply’ or ‘we are one of many investors in a pooled fund so can’t influence the manager’. Younger generations seem to worry more about ESG but trustees tend to be older. Are trustees out of touch with ESG just because of their demographics?,” he questioned.

With regards to the support trustees receive, Vassou, who works on multiple schemes, has seen many investment consultants telling trustees to simply add some vague words to the SIP so that they are compliant with the new requirements.

“The statements they are asking trustees to add to their SIPs are wishy-washy at best and meaningless at worst. This makes investment consultants appear weak on ESG. It is ironic that trustees pay investment consultants handsomely but it sometimes feels that it is a case of the blind leading the blind.

“The only party making positive steps on ESG is the investment manager, something they are very good at publicising. Of course, their aim here is to attract the attention of the consultants and trustees so that more money is invested with them. This means more fees,” he noted.

Vassou believes that the “balance is wrong”, and as asset owners trustees should be telling their investment managers what to deliver on ESG.

“Trustees can then measure investment managers’ performance in the normal way. Investment consultants should be helping trustees to assess the ESG performance of the investment managers and if the investment consultant highlights poor ESG performance then the trustees should move their money away. This means that investment decisions on ESG are treated in exactly the same way as investment return performance decisions,” he said.

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