On the journey to Net Zero and a more sustainable future, pension schemes can lead the way. With £2.3 trillion*in assets under management, their investment decisions can move markets and shift priorities. As with any journey, however, each scheme must agree on its destination and commit to a common purpose and approach.
The ESG continuum
There are multiple stages in creating and realising an ESG-focused strategy: from alignment on ESG goals, to investments that reflect those priorities, to active management and stewardship that promotes your objectives.
Mercer’s March survey of 650 pension plans showed significant variations across pension plans:
At the top end, schemes have focused on specific ESG and climate change beliefs and processes, put into place with specific reporting and monitoring process to ensure alignment. In addition to active stewardship, these schemes allocated a significant proportion of their portfolio to ESG funds.
At the lower end, schemes are using ‘off the shelf’ definitions for ESG and climate change taken from policy and regulatory documents, with only basic reporting and monitoring and limited, if any, active engagement. Portfolio allocations reflect this ‘tick the box’ approach with ESG funds either under- or not represented.
Interestingly, the size and resourcing of a fund did not necessarily determine where it fell in this continuum.
Where do you fit in?
If that top quartile sounds familiar to you, keep up the good work! But if you’re not quite there, like most of the schemes surveyed, don’t despair. It’s not too late, and your efforts are critical not just for your scheme and investors, but for the planet.
Since each scheme has a unique set of philosophies and priorities, the first step is to articulate your beliefs, define your goals and reach agreement. You can start with a simple question – Is ESG accepted as a priority among trustees? If the answer is yes, it’s time to dig deeper and set plan specific ESG criteria. This may be challenging; while most schemes agree that ESG represents risk and opportunity, only 63% believe they have a proficient understanding of ESG. Here are three steps to get started:
Assess the views held by trustees on various topics: climate change, social and governance factors, the importance of stewardship, and the appropriate balance of ESG impact on risk and return.
Since each category of E, S and G criteria contains a myriad of subfactors, you will likely find agreement on certain items but a diversity of opinions on others. Open dialogue will be critical to reaching consensus, particularly where there are strong, diverging beliefs.
Additional research, input from members, or outside facilitation might be beneficial.
Once you’ve agreed on core beliefs, you can set matching investment policies and implement them within your portfolio. Be sure to re-examine your beliefs periodically to ensure they still reflect the priorities of your scheme and end investors.
It’s time to start
A major checkpoint looms with the implementation of mandatory reporting under The Task Force on Climate-Related Financial Disclosures (TCFD). Now required only for schemes over £5bn in assets, by the end of 2023 schemes over £1bn will need to report on governance, strategy, risk management, metrics and targets.
Meeting the requirement will require the right data, which varies by investment type. That’s a significant challenge on its own, as we’ll discuss in a future blog. But the starting point must be your scheme’s core belief system, which then filters through to investment guidelines, voting, stewardship and, ultimately, measurement. Those conversations take time but, when the foundation is in place, you’ll be well on your way to meeting the governance reporting objectives.
How AMX can help
AMX provides pensions schemes, investment consultants, and investment managers with a seamless and standardised way of doing business together. Our new climate reporting hub, AMX Zero, leverages our experience in data aggregation and connecting firms to create reporting solutions for pension trustees and insurance companies.
