DWP gives schemes greater scrutiny of asset managers on voting

The Department for Work and Pensions published on June 17 its response to its consultation on climate and investment reporting, as well as new stewardship guidance.

Launched in October 2021, the consultation sought views on policy, regulation and guidance, which will require larger schemes to disclose the extent of their alignment with the Paris Agreement goal of capping the global average temperature increase to 1.5C above pre-industrial levels.  

The government had also appealed for input on draft non-statutory guidance for schemes’ statements of investment principles, and draft guidance setting out its expectations on how these policies will be implemented.

Many asset managers have made commitments towards net zero and we want to see these commitments being upheld

Simon Jones, Hymans Robertson

The DWP has rejected concerns over discrepancies between different methodologies for aligning portfolios with the Paris goal.

Asset managers may now feel the heat from schemes over their voting approaches when seeking new clients. The government has also encouraged schemes to publish summaries of their SIPs “in plain English” for members.

Unintended consequences of chasing the Paris Agreement?

The government received 60 responses to its consultation, from a collective that included corporate schemes, trade bodies and asset managers.

As of October 1 2022, larger schemes will have to calculate and disclose a portfolio alignment metric and publish their results in their Task Force on Climate-related Financial Disclosures report, within seven months of their year-end dates.

There was broad support for increasing focus on climate reporting. A small number of respondents opposed regulatory requirements to calculate and report portfolio alignment metrics, while there were also concerns about data collection.

“The availability and quality of data with which schemes can make an assessment of their alignment to net zero will be an ongoing challenge, as will the timeline for implementing the regulations,” Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, told Pensions Expert.

“Nonetheless, in promoting an orderly transition to a lower-carbon economy, it is appropriate that the perfect does not become the enemy of the good. These regulations represent a sensible approach to a difficult problem.”

There were also concerns about the potentially unintended consequences of trying to align with the Paris goal.

“We would note that targeting a single number to improve a portfolio’s temperature alignment could incentivise the wrong behaviours,” the Institutional Investors Group on Climate Change told the government in its consultation response. 

“For example, trustees may focus on lowering this figure through divestment rather than engagement with transitioning assets.”

Trustees expected to report before asset managers

A “significant number” of respondents, meanwhile, pointed out that the rules’ proposed implementation date will result in reporting requirements being applied to trustees before they are applied to asset managers, the latter of which will be called upon to inform the former as part of the reporting process.

“While we acknowledge that it is not an entirely optimal outcome for trustees to be required to report against alignment metrics before asset managers in scope of the [Financial Conduct Authority’s] TCFD regime are required to report them, we do not believe this is a strong enough reason for delay,” the government said. 

“We consider the argument that pension schemes will need to rely wholly on their fund managers for the data to calculate a portfolio alignment metric to be flawed.”

The government acknowledged concerns over data, recognising that schemes may only be able to secure full datasets for certain asset classes, such as equities and corporate debt.

It said, however, that it would not make any changes to its original proposal of requiring schemes that fall within scope of the new regulations to calculate and publish a metric for climate portfolio alignment.

“Asset owners need to ask harder questions of their managers to ensure that they are doing all they can to drive change,” said Simon Jones, head of responsible investment at Hymans Robertson.

“Many asset managers have made commitments towards net zero, and we want to see these commitments being upheld and managers being held to account in how they exercise stewardship.”

Holding asset managers’ feet to the fire

Accompanying stewardship guidance issued by the DWP empowers trustees to challenge asset managers more robustly on voting, removes two metrics and urges schemes to think about how they engage with their membership on the issue of climate.

It has been clarified that trustees can use asset manager tenders to “probe whether a prospective asset manager is willing to accept requests to vote on certain matters in a particular way”. 

“Moreover, the guidance also clarifies that trustees can use the ongoing monitoring process to check that their asset managers hold true to any promises they make around taking expressions of wish into account.”

Inevitably, it will be members who will lose out... as SIPs and implementation statements will likely become longer and more detailed documents

Simon Daniel, SPP

The government has removed metrics concerning carbon pricing and the extent to which senior remuneration is affected by climate, in response to concerns that these were not appropriate for pension schemes.

It has also removed its definition of net zero from its guidance after agreeing with observations over its accuracy.

The government has clarified that the Pensions Regulator will be the “primary audience” for SIPs and implementation statements, a move that was criticised by the Society of Pension Professionals.

“At first blush, this seems to consign SIPs and implementation statements to the same fate as has befallen DC chair’s statements,” Simon Daniel, deputy chair of the SPP’s investment committee, said. 

“Inevitably, it will be members who will lose out from this, as SIPs and implementation statements will likely become longer and more detailed documents.”

On member engagement, it has encouraged schemes to write their statements of investment principles, and their implementation statements, in “plain English” for members.

However, the DWP has suggested producing member-appropriate summaries “if scheme-specific research has found that members are more likely to engage with a different style of communication”. The SPP expects more trustees to produce summaries.

LCP partner James Moore observed that “stewardship has perhaps been the Cinderella of the investment world”. 

“The new guidance shines a light on what to date has largely been a neglected issue,” he said.  

“We do recognise that this may seem like just another item in trustees’ already pretty full ‘to do’ tray, but we do believe that it’s one which, when properly addressed, can be a very powerful tool for generating positive investment change.”

Cardano’s group head of sustainability Will Martindale said that he was looking forward to the DWP’s response to its 2021 consultation on integrating social factors into schemes’ investment and stewardship activities.

“To date, there has been less regulatory attention to social risks and opportunities,” he said. 

“But by implementing their commitments to social risks and opportunities with sufficient scale and depth, UK pension funds can accelerate the attention to social issues through the investment chain — here in the UK and the international markets in which we invest.”