The Trustee’s approach in detail
ESG means different things to different people. For the Trustee, it’s about making your investments sustainable in the long-term, and that means managing risk and identifying opportunities.
If there are ESG issues that could have a negative effect on the value of members’ DC pension pots, the Trustee expects its investment managers to be mitigating those risks. And if there are opportunities for higher financial returns for members, the investment managers can explore them. The Trustee adopts this approach across all its DC funds, even if the fund name itself doesn’t specifically mention ESG factors.
Managing ESG risk in this way is all about financial value, which is in line with the Trustee’s fiduciary responsibility to manage the Scheme’s investments on behalf of the members. It’s not about ethical values or ethical investing – in other words, imposing a set of ethical values or beliefs upon a given investment process.
Net zero is short for net zero emissions of greenhouse gases, like carbon dioxide, that cause climate warming. Net zero emissions is when the amount of greenhouse gases being emitted into the atmosphere matches the amount being removed. So, there are zero emissions in total.
Many greenhouse gas emissions are created by human activities such as heating homes and travelling, as well as the way society produces and consumes everyday items like clothes, food and technology. So, to reach net zero, the world needs to change the way it produces and consumes. This is going to be challenging, but it’s becoming the goal for many governments and companies across the globe. As well as reducing emissions, the world will also need to actively remove greenhouse gases from the atmosphere.
In October 2021, the Trustee set out its plans to achieve net zero by 2050 or sooner, in line with the net zero goals of the Paris Agreement. These plans will underpin the Trustee’s approach to managing climate related ESG risks. You can read more about them in the Trustee’s commitment to net zero statement
ESG is important because an ESG issue could have the effect of changing the value of a member’s DC pension pot. For example, if the issue isn’t appropriately managed, the DC pension pot value could go down. However, if new investment opportunities are identified, such as investing in the production of renewable energy like wind farms, the DC pension pot value could go up. This matters for DC members in particular because the value of the investments relates directly to the value of a member’s DC pension pot.
ESG issues can affect any kind of investment. They can be specific to one particular company, such as an inappropriate board structure, or they can be a global concern, such as climate change. They all need managing, as best the investment managers can, to protect the value of the investments.
The Trustee particularly focuses on climate change because it’s a global issue that will affect the whole of the investment world. As such, it’s a systemic risk.
The Trustee has also prioritised managing climate change risk because science says that the world needs to act now. Current estimates indicate that the world is on course to reach an average global temperature that’s 4 degrees Celsius warmer than its pre-industrial level by the end of the century. This is significantly above the 1.5-degree Celsius target set by the UN as the maximum the world can reasonably tolerate.
As a result, there needs to be a global transition into a 1.5-degree Celsius world. This transition will threaten some industries and the companies within them. However, it will also open up new opportunities for companies that provide products and services to help achieve these global targets. This is why the Trustee views climate change as both a risk and an opportunity.
The Trustee expects its investment managers to take ESG issues into account when they make decisions around the way money is invested. Although the Trustee isn’t directly managing the money, it regularly reviews and challenges what the investment managers are doing to make sure it’s in line with the Trustee’s ESG approach and evolving good practice around ESG issues.
Different investment managers have different approaches when it comes to influencing companies on ESG matters. Some advocate engaging with companies, encouraging them to change their practices so that they can be part of the solution to risks like climate change and benefit from the opportunities it brings. Others prefer to simply exclude certain companies from their investments.
The Trustee chooses to work with investment managers who are inclined to engage with the companies they think need to go further on ESG issues rather than automatically excluding them from their investments. For example, when the Trustee was looking to appoint an investment manager for the Sustainable Diversified Growth Fund, a number of investment managers were not selected because their approaches to ESG didn’t fit with the Trustee’s approach.
The Trustee put managing ESG risk on its agenda in 2011 – and has been developing the way it manages ESG risk ever since, particularly around climate change. The Trustee’s commitment to this issue has meant it was one of the earliest adopters of the Task Force on Climate-related Financial Disclosures (TCFD) reporting, and it is a signatory to the United Nations Principles for Responsible Investing (UNPRI). It is also a member of the Institutional Investors Group on Climate Change (IIGCC) and a supporter of Climate Action 100+.
In 2015, the Trustee partnered with Legal & General to develop the Future World Fund, which gives greater weight to companies that score well on climate change criteria. This led to the Scheme being the first UK DC pension scheme to include a positive climate risk tilt in a DC default investment fund. And now the Trustee takes climate change and broader ESG risk into account within all its lifecycle funds.
The landscape around ESG is evolving all the time, so the Trustee is always looking to make sure it is taking ESG risks and opportunities into account in terms of members’ DC investments. This includes regularly checking to make sure the Trustee – and its investment managers – are in line with good practice.
The Trustee is continually looking to strengthen the ESG offering around members’ investments. For example, in 2019, it appointed Wheb Asset Management for the Scheme’s ‘sustainable and responsible’ global equity investment option. And in 2021, it worked with Schroders to develop a new sustainable Diversified Growth fund specially for the Scheme’s DC members. On top of this, the Trustee is in the process of setting up new dashboards that will help it monitor the Scheme’s investment managers’ work even more effectively.