Pat Sharman, co-founder of advocacy group Everyone Matters, explains how diversity on trustee boards can help address complex and important issues such as climate change.

A 2016 Harvard Business Review article concluded that cognitively diverse teams are better equipped to manage, and respond correctly to, uncertain and complex situations.

It also found that the most cognitively diverse team more than halved the time it took to complete a strategic exercise compared to their least diverse peers.

Pension scheme trustees are faced with increased complexity – for example, climate change and nature-related risks. These risks are some of the most difficult to understand, make informed decisions on and manage. We need diversity of thought, which will lead to creative and critical thinking, to address these challenges.

Analysing climate and nature-related risks

The starting point for trustees is to understand the problem, which is immense and complex (especially nature-related risks). They then need to agree a clear policy, measure and assess the risks and the opportunities, look at how to manage these, how to challenge asset managers, consultants and other suppliers, and finally look at ongoing governance.

Every company in which a pension scheme invests – as well as its suppliers – will be impacted by climate change and/or nature-related risks. And, therefore, one could argue that trustees need to focus their attention on the management of risks and opportunities in a scheme’s investment portfolio.

However, they also need to understand how their scheme’s service providers are managing these risks, alongside incorporating members’ beliefs and communicating effectively with them.

Regulation and guidance are evolving. The Task Force on Climate-related Financial Disclosures and the Taskforce on Nature-related Financial Disclosures are great frameworks that provide insight into how a company or pension scheme might manage these risks. These frameworks provide the foundation for like-for-like comparisons. However, is anyone reviewing the content? The Pensions Regulator will fine schemes for late disclosure, but what about the content?

The biggest problem remains the underlying data. Measuring and reporting carbon emissions is relatively straightforward, but biodiversity loss and other nature-related risks need to be measured locally, which adds complexity.

Climate and nature-related risks and opportunities must be looked at collectively as they are intrinsically linked. We must, however, start somewhere, and while metrics are important, the context is just as important.

Evolution in this area is immense. Soon, we won’t be talking about carbon at conferences – instead, subjects such as water stress and water location data will be the hot topics.

How diversity can help

How does this all link to cognitive diversity on a trustee board?

Matthew Syed is a British journalist, author and broadcaster. In his book Rebel Ideas, he talks about ‘homophily’, which is a subconscious habit to surround ourselves with people we identify with, in appearance, beliefs and perspective.

This leads to collective blindness. A good example provided in the book is the US Central Intelligence Agency’s (CIA) past recruitment patterns prior to 11 September 2001. The CIA had a long tradition of predominantly hiring officers who mirrored existing staff – white males from the middle and upper classes who studied liberal arts at college. This meant they overlooked important clues of Osama bin Laden’s growing influence.

Syed also talks about the importance of psychological safety, allowing the generation of ideas to arrive at the optimal solution, and that we must overcome our biases and be open to ideas from people different to ourselves. He provides multiple real-life stories throughout his book providing proof of the power of cognitive diversity and diversity of thought.

I have witnessed the collective blindness, both in business and on trustee boards. It is frustrating to witness when the best ideas are often dismissed or not heard. This is exclusion in its simplest form.

I have empathy with trustees. The role is broad, complex and highly responsible. Decisions made will impact individual lives and could make the difference between a minimum retirement income versus a comfortable retirement.

Given the responsibility, it can sometimes feel safer to follow the herd, especially if you are an introvert or feel like the odd one out. If a trustee board is more diverse in its thinking and a safe environment is created for discussion and debate, decisions will be more collective and more informed.

Achieving diversity

Numerous studies support that cognitively diverse teams are more adaptive and resilient to market volatility and regulatory changes, for example, and are more competitive in disrupting conventional thinking with informed decision-making.

In understanding diversity of thought as a competitive advantage, we can better understand its collective utility.

Demographic diversity will bring some diversity of thought, but it is not guaranteed. We need to consider diversity of thought alongside demographic diversity when we build teams and trustee boards.

I have been very focused on promoting good governance in pensions for many years and I have been a pension scheme trustee myself. That’s why I am passionate about supporting trustees to help them drive positive outcomes for their members.

I am also equally passionate about inclusion and the environment. This is why I co-founded Everyone Matters, a new not-for-profit advocacy group to help the financial services industry to rethink diversity, equality, and the transformative power that inclusive teams and thinking can have on addressing some of the key challenges facing the industry today – such as climate risk, biodiversity degradation, and societal shifts.

Pat Sharman is co-founder at Everyone Matters.