Why is sustainability everywhere now?
I think COVID has been the final wake up call for everyone to stop ignoring what’s happening. People want to take and see action, and the younger generation are now starting to be more vocal.
It feels to me that we’ve reached a tipping point in the last year or so, the pandemic is a major cause of that because it’s exposed underlying problems. It’s certainly brought to the fore some of the issues around inequality in health care, living standards and working conditions, but also helped us develop a greater understanding of issues around the nature crisis.
A lot of the activity that we now see is also being driven by regulatory requirements. The government has set out a series of requirements that we need to focus on.
Why does climate change/sustainability/ESG matter to a pension scheme?
It matters because being concerned about these things should help us to fulfil our principal role which is to pay the pensions to our members. And I think many of us on the Trustee Board believe that the best way to do this in the long term is to take heed of the fact that there is a transition away from carbon-based economy and markets will be forced to be accountable for that.
We need to have a portfolio with assets that are stable, that are resilient, for the next number of years to produce the results that we need to pay pensions. We need to find companies that will help the assets stay safe. And that’s why climate and ESG falls very much into the risk management of the pension fund.
A lot of this comes down to that word sustainability – which means meeting your own needs today but ensuring that other people and future generations can meet their needs too. We need to make sure we are handing over a sustainable scheme to the next set of trustees.
What are the trustees Investment beliefs relating to all things, sustainability related.
In recent years we have gone into more detail by documenting our beliefs around sustainability, climate change, ESG factors. We need to ensure we are considering risks in their entirety, including climate-related and sustainability risks. We need to do as much as we can early on, to ensure that throughout this journey we’re well placed to keep on top of updates in regulation, changes in societal attitudes and to make the most of opportunities when they arise.
It’s been quite a satisfying process to see all the trustees become more and more aware, engaged and knowledgeable as we developed the wider sustainability beliefs especially on climate risk. We’re all very much behind the beliefs on how to manage the effect of climate risk on the fund.
What actions is the Scheme taking on climate change?
Given our position as a large holder of assets and amongst the largest pension schemes in the country, we have signed up to industry groups, which will help us to put pressure on the government and industry to do the right thing. These Industry groups include the Principles for Responsible Investment (PRI) and the Institutional Investors Group on Climate Change (IIGCC). We’re in very good company and by joining up it gives us a collective voice.
In addition to that we’ve made huge improvements to the due diligence from an investment related perspective but also how we look at the companies we engage with. We’ve been working harder to communicate our beliefs so that our investment managers understand our priorities.
We’ve undertaken a series of very in-depth training sessions for the trustees and members of the pension team to ensure that there is a good level of understanding on what impacts the Scheme, our members and what we can actually do. I think education is key around all of this.
Collaboration is also critical. Finding the right people to collaborate with is not always easy but we have tried to limit ourselves to selected organisations and take a measured approach to what is best for the Scheme. We want to make meaningful commitments that drive our behaviours going forward.
What are the regulatory requirements that the Scheme has to make?
The new climate rules are about having good governance processes in place to make sure that the trustees are addressing climate related risks and opportunities appropriately. This includes:
- Being clear on who is responsible for what in relation to climate change.
- Identifying, assessing and managing the climate-related risks and opportunities.
- Taking account of climate change when the trustees make strategic decisions about the Scheme’s funding and investments.
- Collecting data on the Scheme’s investments so that the trustees can understand the climate exposures that the assets have now and over time.
- Setting a target to improve climate risk exposure.
- Reporting annually what the trustees are doing. This report will be published and linked from members’ benefit statements so members will be seeing this reporting in the future.
All these processes are now in place and the trustees will be producing the first report next year. This report will be available to you on our website.
It’s fair to say that the regulatory requirement is about looking at what the Scheme is doing and reporting it, it’s not about the government imposing investment decisions on schemes. By forcing us to look at what we do and reporting it, it presents an opportunity to compare and contrast to see what other schemes are doing. We want to be doing as well as, if not better, than our peers and this reporting requirement allows us to measure this.
Is sustainability here to stay?
Yes. Climate change is real, it’s not going away. The other issues that concern me personally are areas such as human rights, people trafficking and biodiversity. These issues are going to increase in prominence alongside climate change. Thankfully we have a generation of people who are coming through into positions of influence in the world, who really care and are going to be the policy makers of the future.
We have a lot of work to do now, but I believe that over time this will just become part of our day-to-day processes and the fundamental assessment of any investment assets.
Can you give specific examples of engagement in stewardship?
We genuinely believe that through positive engagement we make a difference. Using modern slavery and human trafficking risks as an example, we are pleased to say that for our portfolio, we have assessed the risks fully and our investment managers have been very happy to come on the journey with us. For example, we have reached out to some of the fund managers who aren’t signatories on the PRI and explained our beliefs and how important it is to us as a Scheme. This engagement has acted as an incentive to a number of our managers to become signatories of the PRI.
How does the Scheme influence or try to manage the non-compliance of investment managers?
The key tool for influencing is engagement. Where we don’t get a positive response or at least a genuine consideration, we may choose not to renew their contracts beyond the current arrangements. If we’re not aligned in what we think, then it’s not an effective partnership. The vast majority of the fund managers we’ve engaged with have been very receptive and supportive of our beliefs.
We’ve built mandates that are quite specific on sustainability and what we expect fund managers to invest and not invest in.
We also have to be aware of the issue of ‘greenwashing’ because on the one hand it’s positive that all the asset managers now say that they take sustainability seriously, but it does increase the responsibility on the trustee to dig deeper and not to just take the claims at face value.
The Trustees are really passionate about the changes they’ve made to date and the impact their engagement with the industry will bring about change. You can find more information about what the Scheme is doing in terms of sustainability under ‘About the Scheme‘.