22 Oct 2019 | 10.00 am
How Pension Trustees Can Invest Sustainably
The legal ins and outs for pension trustees with ESG ambitions
22 Oct 2019 | 10.00 am
Pension trustees need to be aware of their Environmental, Social and Governance obligations when formulating their investment policy, writes James Kavanagh (pictured)
One cannot but be impressed by the various speeches and actions by Swedish climate activist Greta Thunberg, who calls for concrete plans for cutting harmful greenhouse gas emissions and strategies for carbon neutrality by 2050. One wonders what this 16-year-old activist would say to pension trustees on their Environmental, Social and Governance policies.
Applying Greta’s energy and enthusiasm to the job of a trustee of occupational pension funds, is it possible to carve out a number of different actions for
consideration when considering how trustees invest, sponsor and member assets? I suggest it is.
- Have you discussed and drafted an ESG policy for your Statement of Investment Policy Principles?
- Did you know IORPs II requires trustees to have a clear stated policy?
- Have you considered how:
(i) ESG factors can have a material impact on long-term risk and return outcomes?
(ii) Good governance and stewardship can create and preserve value for companies and markets as a whole?
(iii) Long-term sustainability issues, particularly climate change, can present risks that require explicit consideration?
While focusing on the ‘E’ and ‘S’, the overall requirements of ‘G’ straddle all of this. They compel trustees to have a clear understanding as to how their pension scheme is resourced, and how better administration, communications and investment outcomes can be enhanced by working with their advisors. To this end, it is no longer satisfactory to comply with basic levels of pension scheme governance as set out by the Pensions Act 1990 (as amended).
Before the Pensions Regulator deals with the transposition of IORPs II into law, it is suggested that trustees can be best prepared by having clear stated policies contained in a Governance Statement or Manual to include the following key reference points:
- Trustee Board and Chair: Are there stated terms of reference and/or aims and objectives, as well as ongoing annual fitness and probity declarations?
- Administration: Ensure you have clear stated documents that deal with any event, e.g. death-in-service of a member l Internal Controls: These should be in place around movement of assets and processing of claims, e.g. was there any out-of-market risk when an investment switch was actioned?
- Outsourced Services: Ensure you have clearly defined Service Level Agreements that are benchmarked against actual performance, e.g. did the actions get completed within pre-agreed timelines by the trustees?
- Risk Management: Have stated actions to support a policy that are reviewed at each trustee meeting and peer- reviewed (preferably by an independent third party) on a rolling two-year basis.
At the end of the day, being a trustee of a pension scheme is a significant responsibility that requires expertise and industry-wide experience. Trustees are often faced with challenging decisions as they attempt to balance the interests of sponsoring employers and beneficiaries while running their scheme in an ever-changing legislative environment. These trustees are responsible for ensuring that their scheme is adequately funded, and for investing vast sums of money.
Therefore, it is vital that trustees are cognisant of regulatory requirements and investment markets, while understanding how to balance risk with expected returns. Trustees need to mandate their advisors with clear, unambiguous objectives and ensure they operate unhindered by any conflict of interest.
Trustee Decisions is a signatory of the United Nations Principles for Responsible Investment, which aim to incorporate ESG factors into investment decisions to better manage risk and generate sustainable, long-term returns.
For further information, please contact: James Kavanagh, Managing Director, Trustee Decisions, Fitzwilliam Hall, Fitzwilliam Place, Dublin 2
T: + 353 1 806 2750