More than two fifths (43%) of UK based trustees and pension managers do not feel properly equipped to monitor and report on their pension schemes' ESG policy to a high standard, according to analysis from the UK pensions side of the asset servicing bank, according to latest research done by Caceis.
From 1 October 2019, new UK legislation has required trustees to outline how they approach financially material factors, including ESG and climate change considerations, into the investment decision making within their Statement of Investment Principles.
The legislation is a step forward towards ensuring trustees have a plan of action when embedding ESG risks into trustee governance and strategic plans for schemes. Good governance involves responsible investing. However, it's clear that implementing an ESG framework won't always be easy to apply because of the numerous touchpoints involved. It can be very difficult, for example, to assess the Environmental, Social & Governance characteristics of a company - and sometimes analysts may disagree on their findings. This creates a governance challenge for trustees, especially as they balance the demands of pension scheme members with the new ESG and climate change requirements.
On climate change, according to Caceis' recent survey, nearly three quarters (73%) of participants in the pensions industry are unfamiliar with climate change-related risks and over a quarter (26%) find getting access to the right information to help with their pensions scheme ESG policy challenging. This information gap will make the necessary reporting even more labour intensive and time consuming. Trustees will want to validate the fact their funds have implemented sustainable or ESG principles'. Gaining access to the right data will be key to do this.
The momentum across the industry is firmly moving towards responsible and sustainable investing. In fact, 55% of those trustees and pension managers surveyed believe that exposure to ESG-related investments will increase significantly in the next three years. This is further evidenced by the fact that 58%feel that better ESG integration aligns with the values of their scheme members. The demand is clearly there.
Ensuring the vital message around the long-term investment consequences of all ESG factors is communicated to all stakeholders, of varying ages and exposures is an area where improved resource and education is needed.
Pat Sharman, managing director, Caceis, said: "While 2019 saw ESG, and with it the improved standards of governance, creep higher on the corporate agenda; now is the year ESG becomes front and centre for UK pension schemes.
"From a corporate citizenship perspective, as well as fiduciary requirement, implementing climate change and good ESG principles will be important for pension schemes of all shapes and sizes to help manage longer term risks for the benefit of members. As a trustee myself, I fully understand the complexities involved - as a result, we are working with the PLSA for the second year running as an education partner and we'll focus on helping trustees navigate this challenging landscape".