The deadline for updated statements of investment principles (Sips) on 1 October 2019 is fast approaching; this time round they will need to include the trustees’ policy in relation to economic, social and governance (ESG) and other financially material considerations. It is no surprise, then, that ESG has been a key topic of discussion at both the quarter one and quarter two rounds of trustee meetings.
ESG can mean different things to different people. It is important at the start of any discussion that trustees establish precisely what is meant by this term, so that everyone is on the same page.
ESG, importantly, is not about ethics, but concerns risk and the impact on investment performance. All other things being equal, a well-run, responsible organisation that effectively manages its business risks is more likely to be profitable and to survive in the long term, and is therefore a more attractive investment proposition for trustees, whose investment horizons tend to be longer term.
Pension schemes typically hold a range of growth assets, including equities, as well as matching assets, including bonds and Liability Driven Investment (LDI). ESG considerations are different for different asset classes; trustees will need to understand the approach to ESG taken by each asset manager or fund in which they are invested and consider whether this is consistent with their ESG beliefs. This could potentially lead to trustees making changes to their investment strategies.
In recent months, we have seen investment managers and consultants transform their approach to ESG. Rather than ESG being a separate consideration, we are seeing it become fully integrated and embedded within investment processes and manager or fund selection. Investment managers are launching new ESG-tilted funds and the marketplace is developing rapidly.
With an increasing global focus on ESG factors, and climate change in particular, this is a topic that younger generations are known to be particularly passionate about. ESG may well be the carrot to get young employees engaged about pensions and saving for their retirement.
Clare James is client director at independent trustees PTL