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As pension fund trustees need to focus their attention on covenant monitoring and engaging with administrators, will environmental, social and governance concerns be put on the backburner?
When trustees are asked what is their main concern, most cite covenant for defined benefit schemes, while defined contribution trustees will likely worry about contributions – especially if they are on a master trust – while the payment of benefits and processing of retirements and bereavements is also crucial.
There have been voices critical of pension funds focusing on ESG, saying they should have instead got the basics ‘right’ to be better prepared for a crisis like this, such as avoiding over-leveraged companies.
There has been a significant regulatory push towards ESG before the pandemic: a requirement for schemes to disclose their approach to ESG in their statement of investment principle came into force last October, and a proposal to amend the pensions bill which is currently going through parliament, so that it would include the power for regulations to “impose requirements on the trustees or managers of an occupational pension scheme of a prescribed description with a view to securing that there is effective governance of the scheme with respect to the effects of climate change”.
A consultation is currently also underway on non-statutory guidance around how schemes can align with the Taskforce for Climate-related Financial Disclosure.
Others, however, say the crisis is the perfect demonstration of why ESG is important, as companies with good governance are expected to fare better, and the way businesses treat employees and customers – part of the ‘social’ in ESG – can make or break reputations, separating the wheat from the chaff.
‘The underlying imperatives have not gone away’
Trustees tend to see ESG as something which is neither going to diminish nor increase suddenly because of Covid-19 but is here to stay and is gaining momentum.
“Whilst the agenda for trustees and similar asset owners may be crowded with new near-term priorities, the ESG issue will not be marginalised by the crisis,” believes Gerald Wellesley, a client director at PS Governance Services.
ESG will not stop as “the underlying imperatives have not gone away, and because asset managers have, as a herd, determined that this is the top new investment trend upon which to fuel asset growth”, he says.
The regulatory drive has been slowed down or “distracted” by the fight against the virus, but there are enough initiatives in train to ensure ESG remains high on the agenda – including the requirement to produce implementation statements from October this year.
Similarly, stewardship is being pushed up the agenda as trustees will, from October, have to explain how they incentivise asset managers to align their investments with the trustees' policies and to make decisions based on the medium to long-ter financial and non-financial performance assessments of companies.
If anything, the crisis will strengthen the case for ESG, Wellesley argues. “The evidence so far is that funds with a sustainability focus have outperformed those without” during the pandemic, says Wellesley, while “social agenda items will be highlighted further as a result of the crisis”, including employee relations and executive pay.
Trustees working to get ready for October
The need to produce implementation statements from October is focusing trustees’ minds on ESG, agrees Keith Scott, trustee director at LawDeb Pension Trustees.
“A lot of trustees are just trying to figure out with their managers what the managers are doing at the moment, where the gaps are, where they need to do more, getting ready for the implementation statements that will have to be published from October,” says Scott.
The implementation statement is “where the rubber hits the road” on ESG, he says, forcing pension funds to do more than inserting an extra line in the SIP.
"I think this will be quite different from just a compliance statement,” he says, and is adding to a sense that ESG has gone from niche to mainstream. “Pretty much anyone you talk to now says this is integral to the process of how we select investments."
The regulatory requirements could also push ESG higher up the agenda for DC schemes, where this has not been as widely adopted, with only a handful of default funds having a climate or ESG tilt. There was increasing demand from the member base for ESG, but this has given way to more immediate concerns like day-to-day finances, says Mark Sullivan, practice leader of the benefits consulting arm at Fidelity Investments.
For schemes and employers, “ESG is important but the focus has shifted to, ‘Try and be brave, let the market ride out if you don’t need money in the short term’”, he says.
Two months ago there was a real focus on ESG driven as much by participants as fiduciaries, he says, but this has changed since: “What's different now is, all of a sudden the stock markets fell... the volatility means it’s less about the asset classes we want [and more about] how do you cope with the uncertainty of volatility and give support, guidance and comfort.”
Does ESG have unstoppable momentum – or is the crisis distracting trustees from it?