Analysis: Pension fund scores on ESG stewardship remain low, with master trusts delegating responsibility on climate activity to their asset managers, new research shows.
Responsible investment campaign group ShareAction ranked the climate policies of 16 master trust schemes managing £34bn on behalf of 15 million savers. It revealed that 14 out of 16 are not successfully challenging companies on the climate crisis.
The findings come as outgoing Bank of England governor Mark Carney laid responsibility for climate change action at the doors of financial institutions. He said they are “not moving fast enough” to limit fossil fuel investment, according to the Financial Times.
Master trusts must adopt climate policies that represent the views of their members if pension investing is to maintain popular legitimacy
Romi Savova, PensionBee
Government-established workplace provider Nest was an exception, scoring highly in the leading category as a result of its stewardship policy and progressive ESG activities.
Nest incorporates a 2C global warming strategy, giving greater exposure to companies that operate their businesses in line with this target, and is now stress-testing the fund using a 1.5C scenario.
Asset manager scrutiny levels fall short
High-scoring master trusts including Aegon, Aviva, LifeSight, Atlas, Smart Pensions and Nest acknowledge the impact of investments on the environment and society, and 8 of the 16 master trusts reviewed by ShareAction have taken steps to incorporate an ESG ‘tilt’ into their default portfolio.
However, ShareAction argued that over-delegating stewardship activities on climate change to asset managers demonstrates a breakdown of trustee ESG responsibility, and was a key factor among master trusts that scored low on stewardship.
Its findings showed how those low-scoring master trusts are overly reliant on entities such as their sponsoring group, asset managers and investment consultants for direction on responsible investment issues.
ShareAction campaigns manager Lauren Peacock said: “Millions of savers are putting their life savings into the hands of pension funds who are playing a dangerous game with it. By passing the buck on climate change, they give little comfort that the world and their savings will be protected come retirement.”
New regulations introduced in October by the Department for Work and Pensions require schemes to publish more detailed statements of their approach to ESG factors and stewardship of investment principles.
The regulations specify the schemes should evolve their own policy on so-called stewardship activities, with a clear mandate on voting and engagement across the scheme’s investments.
Nest was the only pension provider that demonstrated a higher level of stewardship through its own voting policy with which to engage asset managers and transparency about the companies it engages with.
Pooled funds present voting issues
However, while trustees can have little excuse for not representing members’ best interests, the question of how they put policies into practice is more nuanced.
PensionBee CEO Romi Savova said: “Master trusts must adopt climate policies that represent the views of their members if pension investing is to maintain popular legitimacy. It would be inconceivable for our collective social wealth to be invested in a way that indiscriminately furthers the destruction of our planet.”
Yet Ms Savova noted that under associated contracts, asset managers take on total voting rights of passive pooled funds, meaning trustees must rely on their asset managers to vote appropriately.
She said: “Asset managers find it easier to take a singular approach, rather than seeking to represent the views of each pension fund – which may conflict with those of another pension fund – individually. As a result, most trustees are beholden to the approach of their asset manager.”
Providers divided on mandatory simpler annual statements
Workplace providers such as Smart Pension and PensionBee are supporting the government’s intention to introduce a standardised annual statement, with calls for legislation if take-up from schemes does not increase.
“Stress testing under various scenarios can reveal potential undesirable outcomes early on. However, one must bear in mind the limitations of stress testing using a future outcome on today’s asset position,” Ms Savova added.
Smart Pension head of sustainable investment Rachel Neill said: “ShareAction’s report demonstrates the progress that’s been made in the master trust space on ESG and stewardship and is also clear on where more can be done.
“Being able to show how a scheme’s investment activity reflects things like the climate emergency helps to give members reassurance on the decisions that are being made on their behalf.”
