With many pension schemes putting environment, social and governance at the top of their strategic priorities, ensuring that consultants and advisers are on the same page is becoming ever more important.
But diverging approaches to ESG integration and difficulties in obtaining data on key metrics apparent across the sector mean that there are no guarantees that trustees can count on external expertise to maintain the desired pace of change.
Dalriada professional trustee Jessie Wilson “hesitates” to say that schemes can guarantee their advisers’ ESG practices are improving in parallel to a scheme’s own, with the “rapidly evolving nature” of the ESG pensions space creating a volatile backdrop to a multifaceted problem.
Advisers should not just report data, noting the problems
Jessie Wilson, Dalriada Trustees
Yet schemes can ensure they are having conversations with their advisers about “both their current and forward-thinking outlook”, she says.
On the same page
Trustees can use these discussions to assess whether their advisers are improving their ESG practices. For example, Wilson looks to gain a qualitative understanding of their approaches and evidence of how providers are improving data quality and reporting transparency in this area.
“Currently, key ESG statistics such as carbon-related measures have differing methodologies and incomplete data used to calculate them. Moreover, data disclosed on voting and engagement in implementation statements is often incomplete,” she notes.
“Advisers should not just report data, noting the problems. Rather, they should be clear on how they are pushing for improvements and how they will use this improved data in the future. As ESG reporting and data are still improving, qualitative conversations with advisers are key in helping with evidencing changing ESG practices.”
While the data to evaluate these factors is less than perfect, it is improving, says IC Select director Donny Hay.
He is interested in seeing how consultants and fiduciary managers integrate ESG considerations into their research processes. “This usually involves a long chat and significant investigation. We want to see evidence of what they do and why — it helps us sort the wheat from the chaff,” he notes.
Yet the initiative must come from trustee boards, with ESG beliefs determined and integrated into statements of investment principles, Hay continues.
“Quite a few boards have not yet done that,” he says, creating ambiguity over how ESG practices will “contribute to better outcomes”.
Investment consultants’ research processes inherently “demand a lot from managers, but they may not hold themselves to the same due diligence processes”, he adds.
Identifying a solution
Johnson Law Group managing director Jamie Patton points to a parallel in consumer law, suggesting that inspiration can be taken from savers’ ability to shop around to find an ESG product best suited to them.
Pension freedoms brought in the opportunity for savers to “shop around”, not only looking for a good return but for something that is ethical.
“If it subsequently turns out it was not as ethical, then they have grounds for a complaint to either the Financial Ombudsman Service or the Financial Conduct Authority,” Patton notes.
In short, if consumers can shop for the most suited product or service, then so too can schemes.
This is important as an ESG approach offered by an adviser may not be appropriate or deliver the desired outcomes, Hay suggests. Additionally, schemes “may have to consult the sponsor” before an ESG framework is applied to a scheme, adding to the complexity.
He continues: “Every investment consultant and fund manager has an ESG process. The better ones have clearly communicated it. The question and challenges are how to tailor it to individual pension funds.
“Some will see ESG as a tick-box exercise; others want to be seen as leaders in the field. Consultants and FMs must be able to apply their approach across a whole spectrum of attitudes.”
Bargaining power
In shaping the ESG approach of schemes or advisers, larger pensions may benefit from additional bargaining power over smaller schemes, but invoking change in external organisations is not always feasible, Wilson says.
However, commercial needs “will prevail”, she adds, with increasing ESG regulations placing “significant interest” in these propositions.
Act now to avoid crushing costs of carbon offsetting
CPD: With pensions schemes increasingly committing to net zero targets, Stafford Capital Partners' Marek Guizot outlines what trustees need to be doing in order to minimise substantial future compliance costs.
“If the commercial requirement to provide ESG propositions becomes an imperative, then advisers will have to provide these or [they] will lose clients. An individual scheme may not be able to change the services of an adviser but collective changes in the industry certainly can,” she points out.
Yet there is a concern that some advisers see ESG as an opportunity to create fee revenue rather than better outcomes for schemes. Increased regulation, with ESG at the core, will probably increase adviser fees for assisting trustees in meeting obligations.
Wilson made it clear, however, that advisers should not introduce excess fees for “providing their core offering”.
