Pension trustees increasingly rely on investment consultants to deliver ESG agenda

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A new study from the Pensions Management Institute (PMI) and BMO Global Asset Management finds that, as ESG has risen to the top of pension trustees’ agendas, most trustees are relying on investment consultants for their schemes’ adherence to sustainability goals.

The importance of ESG to trustees has soared since the Department of Work and Pensions’ consultation on climate risks in August 2020, 

According to the study, ESG was ranked a “high” agenda item by more than half of trustee boards, 53 per cent, compared with just 29 per cent before the consultation.

The UK government aims to introduce mandatory climate-related reporting in line with the TCFD (Task Force on Climate-Related Financial Disclosures) recommendations across the economy by 2025, with pension schemes among the first to be targeted. The new reporting requirements will come into effect for schemes with GBP5 billion or more in assets from October.

However, many pension trustees remain anxious about the changes. One in five trustee boards are not confident that they understand the new TCFD reporting rules, according to PMI and BMO Global Asset Management’s study. Another 19 per cent say that they have not received training on climate change risks and opportunities. 

Gareth Tancred, CEO of the Pensions Management Institute, comments: “Many will be glad to see that ESG is now considered a top priority for most trustee boards. However, it is concerning that a significant proportion of trustees do not feel fully confident in understanding the upcoming TCFD rules and responsibilities.” 

As a result of trustees’ lack of confidence in their own and asset managers’ ESG capabilities, investment consultants have been picking up the slack. 

Almost three quarters, 73 per cent, of trustees rely on consultants for their adherence to ESG rules. 

This is a “significant responsibility being laid at the door of the consultants but also a very significant opportunity for them,” note the study’s authors.

Investment consultants and advisers have already been active in helping to prepare pension trustees for the onset of mandatory climate risk reporting. 

The Investment Consultants Sustainability Working Group – which includes industry names including Aon, Mercer, and Willis Towers Watson – published a guide to “climate competency” for trustees in January.

Elsewhere, fiduciary management and risk management service provider Cardano has recently committed to a “climate strategy” for client portfolios. This includes measuring all portfolios’ carbon footprint, greenhouse gas emissions, and its contribution to climate change.

However, the authors of PMI and BMO Global Asset Management’s study warn: “Trustees need to be mindful that the buck stops with them if things don’t go to plan – regardless of how far removed they are from the actual investment at the end of the process.”

Trustees also lack confidence in asset managers’ ESG capabilities. One in four trustees doubts that their asset managers are holding their investments to account on net-zero emissions targets.

James Edwards, Director of UK Institutional Sales at BMO Global Asset Management, says: “The pressure to make the changes required as quickly as possible has eroded the confidence of some trustees and, concurrently, placed a greater reliance on the support of advisers.”  

Edwards adds that BMO wishes to use this research to work with trustees to identify the barriers that still need to be overcome and consider practical solutions.

The study also found that six in 10 trustees see “material obstacles” to implementing ESG policies. These include a perceived lack of evidence of the financial performance of ESG investments, and a lack of products and services in the market.

Tancred concludes: “Given the stakes, this has to be addressed as soon as possible. We would encourage those trustees that are yet to engage with ESG to learn more about it to see how their scheme can more effectively manage climate change risks and opportunities.”

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Madeleine Taylor
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