Young Money was pleased to be invited to a high-level seminar in the City last week, which highlighted some fundamental and fascinating questions…
The Transparency Task Force of pension experts wants to explore:
*Is society recognising that maximising short-term profit regardless of long-term adverse social consequences is no longer acceptable?
*If there is a renaissance, what can the pensions and investment industries do to help it?
*Should climate change and related environmental issues be considered a financial risk for pension schemes?
*How should progressively-minded (pension fund) trustees go about deciding what to invest in, such that they can help achieve the returns needed without damaging the planet?
*Does any of this actually matter to the typical member of the typical pension scheme?
Well in the two hours allocated to this little agenda, earth-shattering pronouncements or ideas were hardly to be expected.
But it’s encouraging to know that these sorts of questions on ESG (environmental social and governance) are now being asked among the faceless stewards of our financial futures.
“Who is checking whether companies are doing what they say they are doing?” asked Sarah Wilson of Minerva Analytics. “There is no point in fantastic quarterly returns which destroy the world your pensioners live in.”
But she was optimistic that the government, regulators and the Bank of England were putting in place “sticks, to get people to change…it is no longer an option to ignore ESG, there will be change”.
There is pressure for pension funds to change
Joss Tantram, of consultancy Terrafiniti, said the renaissance could be encouraged by changes to company law and to accounting rules. For instance, a company’s ‘licence to operate’ could be related to its sustainability, and its viability as a ‘going concern’ could be measured not over one year but perhaps over a longer period. “How about five or 10 years – or 15 years would be interesting.”
Consultant (and former company auditor) Vincent Neate said you could not rely on individuals to change anything through their pensions, or change very much as consumers. “We are all far too deeply invested in the status quo,” he said. But there was another way: “Fund managers are incredibly clever, you just have to give them the right incentives to do things differently.”
Sarah Wilson pointed out that NEST, the default pension scheme for auto-enrolment, had a strong ‘stewardship’ theme in its mainstream fund, as well as a separate ‘ethical’ option.
Stuart Woollard, co-founder of the Maturity Institute, cited a recent quote from Larry Fink, boss of one of the world’s biggest asset management groups Blackrock. Fink said:
“Society is demanding that companies serve a social purpose….every company must make a positive contribution to society and benefit all other stakeholders.”
Woollard said the best companies understood they were there to benefit society and they had to align the interests of workers, customers and suppliers to that, to differentiate themselves. Very few companies had actually achieved it.
The Institute has devised a rating system to measure value creation from ALL a company’s relationships, not just the one with its shareholders. To score well on TSV, Total Stakeholder Value, a business has to “articulate a purpose that encapsulates both commercial and societal goals”. In a pilot study on banks, Handelsbanken came out well ahead of the field. Santander scored well, while Barclays was at the bottom.
Meanwhile JB Beckett, UK Director for the Association of Professional Fund Investors and a monitor of supposedly ‘green’ funds, claimed: “I am the bogeyman. I scour my way through the greenwash that pours out. Don’t believe the brochure.”
Are pension funds guilty of greenwash?
Ronan Hodge, who oversees the Bank of England’s market intelligence function, said the Bank was encouraged by the way institutions were “starting to integrate environmental risks”….in other words, scrutinise all companies’ business models for sustainability.
Caroline Barraclough of ESG Communications, said all pensions had some exposure to sectors which would be hard hit by the transition to a lower carbon economy. Pension trustees had to move from avoiding negatives to finding investment opportunities in companies which were “progressing the transition”. She added: “More and more investors have started to think about the parts of the economy that will rise in a low carbon world.”
But Paul Klumpes of GLG Consulting noted that there was no requirement on pension schemes to disclose anything in the public domain, and the UK was one of the few countries where there was “no transparency”.
And Bob Ward of Pascali revealed that of 40 ‘governance’ reports by pension fund trustees over the past year, only five had mentioned ESG . “Providers have reams of stuff on their websites but trustees haven’t commented on it. Are trustees asking the questions?”
According to JB Beckett, any fund manager or company could tick the box of having an ‘ESG framework’, but it might not mean very much. Most investment houses had been quick to sign up for PRI – the Principles of Responsible Investing – perhaps because it was free! “But they have only just started to ask what they have signed up for,” he said. “A vast amount of the industry is at risk of losing a PRI rating.”
We’ll be watching that space very closely…