The £609m University of Manchester Superannuation Scheme has appointed two new equity managers who invest in companies picked on sustainability grounds.
Sustainable investing has risen up trustee agendas in recent years, as trustees become more aware of the potential financial risks of failing to address environmental, social and governance issues.
For several years the defined benefit UMSS, has updated its 9,026 members on its sustainability efforts via its annual newsletter.
If trustees do want some kind of sustainable investment fund, it’s important first of all that they understand what it is they mean by that
Claire Jones, LCP
This outlines that the trustee believes good stewardship and a focus on ESG issues have a positive material impact on investment returns.
Its most recent 2019 newsletter states that the investment managers evaluate ESG values as a matter of course, reviewing “sustainable energy use, environmental impact, business relationships, working conditions, accounting methods and even political contributions”.
According to the document, “with this in mind, the trustee has appointed two new equity managers who invest in companies chosen on sustainability grounds”.
The scheme has not disclosed any further details on the managers or mandates involved.
Do your research
Claire Jones, principal and head of responsible investment at consultancy LCP, highlights that when trustees are looking at sustainability, there is a difference between picking a manager that takes account of ESG issues properly within a mainstream fund, compared with choosing a fund that meets some kind of sustainability criteria.
“If trustees do want some kind of sustainable investment fund, it’s important first of all that they understand what it is they mean by that,” she notes.
Some trustees may want a product that has a specific sustainability objective. This differs from a product that integrates ESG “but is potentially investing in companies that trustees may not consider to be sustainable but where the manager views the ESG risks to be priced appropriately”, Ms Jones says.
Schemes, with the help of their consultants, should make sure that managers have a good understanding of ESG issues and have processes that embed ESG considerations in a systematic way, according to Ms Jones.
She says that focusing on stewardship, as well as the culture of the company and whether ESG is embedded in that culture and “led from the top”, are also key.
“Those are things that we would look for across most of the funds that we research and that would be a baseline level that would then also apply to sustainable equity funds, but they need to go that bit further to invest in sustainable companies – not just to have good ESG processes,” Ms Jones adds.
Trustees must consider their policies on ESG
Regulatory developments have helped push the topic of sustainable investing up trustee agendas.
From October this year, the Department for Work and Pensions will require schemes to outline in their statement of investment principles how they take account of financially material considerations.
The government has made it clear that these financially material considerations include – but are not limited to – ESG considerations, such as climate change.
Trustees will also have to set out their policies regarding the stewardship of investments.
Some schemes publish detailed and publicly available information on how they are investing responsibly.
The trustees of the Transport for London Pension Fund, for example, published their first Annual Report on Sustainable Investing in December 2018.
The document provides a summary of the £10.3bn scheme’s activities to date and how these activities form part of their long-term strategy.
“Sustainable investment is definitely being talked about more at trustee meetings, and trustees’ levels of engagement have risen greatly,” says Thibault Jeakings, senior associate at law firm CMS.
This is due to a range of factors, according to Mr Jeakings. Investment managers are increasingly making ESG issues part of their offerings, while consultants are also raising it as an issue for consideration.
Time to ask more questions on ESG
Regulatory developments, together with a general rise in public awareness of issues such as climate change, have helped move environmental, social and governance considerations up pension scheme agendas, but will greenwashing, lack of transparency and poor understanding hinder trustee efforts?
“At the same time, the increasing prominence of sustainable investment and issues such as climate change in the news, along with increasing regulation, must also be impacting on trustees’ awareness of the issues,” he notes.
In preparation for the new requirement in October, Mr Jeakings says trustees will need to consider their policies on ESG and member engagement before the regulations come into force, and obtain clear advice on how they will need to update their statement of investment principles.
He points out that the latest DWP regulations do not require any changes to trustees’ investment choices and trustees still need to bear in mind that the purpose of their investment powers is to provide pension benefits to scheme members.
However, “the regulations do mean that trustees have to engage more with ESG investment and provide information on their policies,” he says, adding that “it seems inevitable that increasing regulation and trustee engagement is going to increase the impact of ESG investment in the pensions sphere”.
