Without Better Data Pension funds cannot possibly fulfil their ESG mandates

Pension fund trustees in the United Kingdom are now under a fiduciary obligation to manage environmental, social and governance (ESG) risks on behalf of the members of the fund. This is not an easy duty to fulfil.

That is partly because pension fund trustees cannot simply choose what they believe to be right in terms of ESG. They must ensure the fund has sufficient assets to pay the promised pensions (in defined benefit, or DB, schemes) or maximise the value of the pension portfolio of the members (in defined contribution, or DC, schemes).

Trustees have somehow to demonstrate that they take ESG fully into account, without causing financial detriment to the fund. Needless to say, there is no shortage of investment consultants and asset managers willing to declare that this is a bogus dilemma, because ESG-driven funds will outperform in future years.

The “wall of money” ESG strategies are attracting may prove them right, even after taking into account the massive transactions costs of transitioning to an ESG-driven strategy.

But proving ESG credentials will take more than ditching managers that buy oil, mining, tobacco and firearms stocks and appointing managers that invest in renewable energy, or adding an ESG fund to the defined contribution pension plan roster, or signing up to the United Nations-backed Principles of Responsible Investment (PRI).

It will take data, not just to choose investments but to convince members and regulators that the fund is fulfilling its duty to take ESG seriously.

The Pensions Regulator (TPR) has told trustees that they ought to sign up to the Stewardship Code published by the Financial Reporting Council (FRC). Its purpose is to encourage the “responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.”

Trustees have since October 2019 had to include in their Statements of Investment Principles verbiage on how they vote at AGMs and how they engage with the companies they invest in – even though the switch to passive investing makes it virtually impossible for some funds to do this.

In addition, trustees must (since October 2020 for DC schemes from 1 October 2021 for DB schemes) report how they fulfilled their ESG responsibilities in the previous year, in online, publicly available statements.

Although there is no shortage of consulting services and ratings from the major investment consultants, and a wide variety of other products from data vendors, rating agencies, technology vendors and global custodian banks – many of which want asset managers as clients, not asset owners – the extent and quality of the data about ESG factors falls far short of what is required to make informed and convincing public statements.

This Future of Finance webinar will explore what ESG data is available, where the most serious shortcomings lie, and what is needed to fix them

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