At the end of last year, ShareAction published a review of the 16 largest master trusts by assets under management (AUM). The review set out to explore how environmental, social, governance (ESG) and climate risks are being addressed by master trusts serving the defined contribution auto-enrolment market, in light of recent policy developments in the UK.
Findings of the review were mixed. Asset owners are acknowledging that their investments have a broader impact on their beneficiaries’ lives. However, there is also a lack of oversight and attention to stewardship, which undermines the attention being given to impact.
Stewardship is a crucial pillar of responsible investment. It is important for pension funds to take a strong approach to engaging with the world’s most carbon-intensive companies, which will not only mitigate the most severe impacts of climate change, but also ensure that companies and portfolios are commercially resilient to the associated risks. The UN PRI estimate that up to
£1.74 trillion pounds, or 4.5 per cent, could be wiped off the value of global stock markets due to climate change.
ShareAction puts only Nest, the government- backed pension scheme with 8 million members, in the leading category. Nest actively engages its asset managers on its voting policy, and is transparent about talks with companies and the outcomes those talks achieve. Furthermore, it is reducing its exposure to fossil fuel stocks and increasing investment in companies that will benefit from the low-carbon transition.
TPT, ranking in the category below, also provides evidence of direct climate engagement through the Climate Action 100+ initiative. By contrast, the majority of schemes in the review are delegating responsibility for voting their shares and climate engagement activity to their asset managers.
This is concerning because regulation requires schemes to have their own policy on so-called stewardship activities, including voting and engagement. Without direction from asset owners, asset managers are free to vote without a mandate. Another finding of the review is the over reliance of master trusts on other market players. While corporate group practices might be of a good standard, the aim of the new regulation is to ensure trustees are undertaking a thorough process of considering how ESG and climate are embedded in their investment processes. If trustees are simply referring to other agents’ policies, it suggests they are not undertaking this process and a potential result is that RI is not driven through the investment chain.
That being said, we understand the difficulty for master trusts who have complicated structures. Competing priorities and responsibilities can make full implementation of ESG slip down the agenda. ShareAction wishes to support schemes to have a collaborative impact together, reducing the burden on resources but encouraging schemes to use their voice.
With assets increasing significantly since 2010 and the trend set to continue, master trusts are significant players in the pensions industry with the resource and influence required to give their climate policies real meaning.
Master trusts which are well-governed are therefore a key mechanism through which the financial services sector can mitigate its negative impact on society and the environment.
Investment by pension schemes and other institutional investors does not happen in a vacuum: it has an impact on the world, the environment and society. DC members have long investment timeframes and the impact their money has now will impact members’ quality of life in retirement. Some schemes in the review are recognising the impact of their investments, which is a welcome development.
The next step is for schemes to measure and understand their impact, which no doubt will be a process done in partnership with asset managers. In practice, this could cover a range of activities including pushing asset managers for more information on the environmental and social impact of their current investments, developing stewardship policies that consider the impact of assets, and looking for investment opportunities focused on positive impact.
At the end of this year, we will see schemes publish implementation policies. This will hopefully give us further insight into any action being taken on climate change. As the current policies stand, it’s certainly not enough.