Phoenix Group calls for harmonisation of ESG ecosystem

A new report, sponsored by Phoenix Group and published by the Pensions Policy Institute (PPI), has found that when pension schemes design their approach to ESG, half of are finding either too much information or conflicting information to be a major challenge.

The landmark report, called ‘Engaging with ESG: Climate change’, explores the way in which pension scheme investment takes into account climate change within the current regulatory landscape, and explores the proposals for more effective support to encourage evolution and improved risk mitigation. The report is the second output in the Engaging with ESG series from the PPI.

The PPI report recommends that joined-up goals, strategies and data sources across government and industry will improve scheme engagement with climate change. This includes establishing a consensus on goals across all stakeholders to ensure climate change considerations are integrated across the investment landscape by a certain date and agreed steps on how to get there. There is also a focus on the need to produce a centralised data source which can provide a starting point for schemes unsure of where to start.

Michael Eakins, Chief Investment Officer, Phoenix Group, says: “What is clear from this report is that there is no easy or quick fix to the issues we face. Both industry and government must work hand in hand to establish a consolidated strategy, with simpler, centralised data sources. This lack of a harmonised reporting process is proving to be a substantial barrier to improving the effectiveness of risk mitigation in schemes’ investment strategies”.

The report also finds that while climate change has received substantial focus and some schemes are doing a lot in this area, other ESG factors need improvement in order to support sustainability and mitigate risks. The rapidly changing regulatory environment is pushing more schemes to consider climate risks in their investment strategies, but improvements are needed particularly when it comes to scheme oversight and understanding of engagement and stewardship behaviours.

Gareth Trainor, Head of Investment Solutions at Phoenix Group, adds: “On ESG, we risk both too much, and too little leadership. There are many industry groups, regulations, initiatives, and competing propositions to consider, and the industry needs to get their ducks in a row. The ecosystem needs to be simplified for pension schemes and their members.

“Although many pensions’ schemes, advisers, asset managers, trustees and providers are doing a good job at incorporating ESG risks into their strategies, we believe that it is time for industry bodies to pool their collective capabilities and lead the sector by harmonising what best practice looks like. Now is the time for industry bodies to step forward and take the lead so that practices around ESG can be standardised across the industry, including reporting, methodology, metrics and engagement.

“Given the complexity of the stakeholders within the market, and the various types of schemes and arrangements, it is difficult for pension schemes and trustees to stay on top of what is a very complex issue and to be clear on roles and responsibilities. It’s particularly challenging for smaller schemes. We believe industry bodies could help to clarify what is needed for all parties in the value chain.”

Lauren Wilkinson, Senior Policy Researcher at the PPI, says: “Focus on ESG has increased in recent years and the landscape for climate change investment especially has been developing quickly.  Policy and regulatory change are also putting further pressure on schemes to learn and innovate. Schemes may need to take a more proactive role in engaging with those acting on their behalf, including pension providers and asset managers.  A more joined-up approach across government and industry, especially in terms of practical steps, is also likely to be needed.”

This report is the second of three publications in the Engaging with ESG series, following the publication of Engaging with ESG: The story so far in December 2020, to be followed by a third publication on ESG risks in April 2021.

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