Pension trustees see ESG and ‘continuous governance’ as top priorities for 2021

ESG valuations

ESG integration is considered a ‘pressing priority’ by 98 per cent of trustees of defined benefit (DB) pension schemes as they look to the year ahead, according to a recent survey from River and Mercantile. 

Almost all respondents (95 per cent) agreed that understanding the ESG approaches used by investment managers during portfolio construction and stock selection will be key. 

“Looking forward, the move toward investing in more sustainable portfolios will be a key trend,” says Peter Daniels, head of Fiduciary Management Evaluation at consultancy Barnett Waddingham. 

“For any scheme investing in growth assets over the next say five-to-10 years and beyond, we consider the move to a lower carbon world, and the risks and opportunities that this will bring, to be a material factor to address in portfolio construction.” 

The UK government has been pushing for more transparency from pension schemes over climate risks, announcing that reporting will be mandatory for large pensions schemes from October.

According to the report, a ‘progressive improvement’ in transparent reporting will be needed, and trustees will need to explain or justify decisions taken from an ESG perspective and the impact on performance.

The report found that it has become important for trustees to start considering the impact of climate risk on their investment portfolio, and recommends starting with implementing carbon footprinting and greenhouse gas metrics.

Jonathan Craddock, an investment consultant at EY, says he has observed a “greater emphasis being placed on ESG risk management by fiduciary managers too”. “Just a few years ago it would be the exception for good-quality ESG reporting to be provided to trustees, whereas now it is much more the norm.” 

The survey also found that long-term funding will be a key theme for 2021, with more than 90 per cent of respondents stressing the importance of realigning their investment strategy with long-term funding goals.

“The common thread is that 2020 has seen many schemes take a step back from funding progress of prior years. Indeed, some might call it a lost year for defined benefit funding,” write the authors of the report.

According to the Pension Protection Fund, DB scheme funding levels fell to an average of 94.9 per cent as of March 2020, down from 99.2 per cent a year before, due to market movements. 

According to the survey, four out of five consider it a key priority to reassess their target investment return from the assets as well as the key risks that lie ahead. 

In 2020, swings in asset and liability valuations sent plans at DB schemes into disarray, to the extent that many trustees have reconsidered their approach to governance.

Ad-hoc online meetings are increasingly favoured, with 80 per cent of trustees saying that traditional quarterly meetings, which may take place weeks after a quarter has ended and contain out-of-date information, have lost their relevance.

Continuous governance and ad-hoc meetings has increased the need for up-to-date data and technology solutions, with 75 per cent of respondents saying they need better access to information.

“As we look forward from here, continuous governance doesn’t just mean dissecting historic investment performance on a more frequent basis. From our survey, respondents acknowledged the importance of looking forward. To do so, there needs to be a great usage of interactive tools that are clear and straightforward to understand and support informed decision making,” reads the report.