Do we have to be told?

Share Action’s Master Trust survey starts with the question “IS REGULATION ENOUGH?” and through the 26 pages of Lauren Peacock’s survey that remains the key question.

But there are secondary questions…

Can we trust our trustees , should they delegate to asset managers, should asset managers exercise their voting rights or pass them on, what does “stewardship mean in practice?

Ultimately, what choices do we have as investors in how our money is managed?

It’s helpful to establish what we’re studying here and the report helpfully does just that.

What is responsible investement?

Responsible investment (RI) is an approach to investment, which takes into account environmental, social, and governance (ESG) risks. It is characterised not only by addressing these risks in investment strategy, but also by activities such as actively engaging with investee companies on their ESG practices and seeking to steward them over the long-term.

I guess my house view is  “If you have to be told this stuff, then something is wrong” and what I found in Lauren’s report is that despite all the noise, more’s wrong than right.

Do we have to be told? I suppose we do.

What’s wrong?

The report divided the 16 master trusts studied into four groups

In judging the development of RI within these propositions, Peacock doesn’t use a heavy hand, but it’s hard not to feel amazed that NOW pensions with its strong Scandinavian heritage , its segregated investment fund and its relative seniority, should lag younger , less well-funded rivals.

It is good to see NEST leading the way, we have paid for it to do so with a  subsidised loan from the tax-payer and we appear to be getting value for that money. NEST and NOW bookend a number of commercially funded master-trusts that have moved at different speeds.

From my independent research, I find few surprises. I am really pleased to see Smart at the front of the pack as frankly their initial investment proposition  in 2016 was rubbish.

I’m not surprised to see Legal and General leading the insurers (alongside People’s Pension – who have an insurer behind them). People’s appointment of Nico Aspinall as CIO is clearly bearing fruit.

I am surprised to see so many lagging insurers in the “Building phase”. I will be looking particularly closely at their Chair’s statements and the IGC statements to better understand whether the lag is occurring.

It’s good to see two consultancy driven master trusts – Atlas (Capita) and  Lifesight (WTW) reflect well on the capacity of the ESG consultancy units that sit behind. Mercer and Aon will clearly be concerned not to be in the van.

What’s wrong is that we have such dispersion and the rest of the report makes it clear that if regulation is working, it’s not working hard enough.

A lack of conviction

Peacock makes it clear that even those within the financial industry taking climate change seriously, appear to view it predominantly in terms of how it poses risks to, and opportunities for, maximising their investment returns.

By framing the problem of climate purely in risk terms and not considering impact, market participants focus their efforts on resilience, instead of working on mitigation.

In terms of the exam question, we should think of responsible investment as a means of rewarding the planet , not just ourselves. This might sound  impossibly altruistic but it is precisely what surveys from Ignition House and Investec are showing. People, especially younger people, are prepared to pay for responsible investment in terms of increased risk of reduced returns.

For trustees this represents what seems an impossible dilemma: are they here to maximise pensions (at least pension pots) or are they here to make our “future-world’ a better place. This week’s events in Australia suggest that that continent may not be habitable in the lifetimes of many younger savers.

I suspect that the debate about whether adopting ESG policies adds to investment returns has done more harm than good. If people are prepared to pay to reduce climate risks and improve society and the governance of business, then whether that payment leads to improved performance is secondary. What matters is that ESG gets done.

There appears to be a lack of conviction both among the trustees and the providers about what is the responsible investment strategy.

To the report’s method

The report limited its scope to the largest 16 master trusts by assets (with Smart replacing BlueSky by dint of its large membership). Some notable AE master trusts aren’t represented – Salvus, BlueSky and Creative could have, and I hope they will next year.

The report took trustee boards seriously, pointing out that unlike IGCs (who now have a duty of oversite), trustees are actually asset owners and have a duty to implement.

The scoring of providers put double points on providers who published policies and marked down providers with policies that only emerged after investigation. Share Action clearly see the promotion of ESG as critical to responsible investment and I support this. It does mean that many who lagged will feel they can move up the leader-board if they adopt a more transparent approach in 2020.

But only if people take Share Action’s work seriously – which is what this blog is doing.

And it’s findings

Once the report moved out of “exec summary mode”, it became a lot more clinical in its findings.

1. It found the weakest-scorers were following the lead of others – and delegating strategy that should have sat with them (trustees as “asset owners”)
2. It found that many master trustees were not exercising stewardship directly but delegating to others
3. It found that most providers were not engaging Government on policy but engaging with regulation. Rather than driving regulation, they were reacting to it.
4. Half of the group had adopted “tilts” in their asset allocation to in time for the publication of the survey.

“Time” was an important word in the survey. Peacock pointed out that by the time that some trustees get round to adopting ESG tilts, any leadership advantage will have been lost. It implicitly criticises strategies that await evidence of financial advantage as leaving members exposed to under performing assets.

The report ends on the front foot with a call to action

What we need to see next is action and hopefully the implementation policies, which schemes have to produce next year, will show this. Rather than delegating, asset owners have an opportunity to embrace responsible investment and secure future sustainable returns as well as create a better world for their members to retire into. Trustees need to be responsible for setting the tone, and integrity of all stewardship undertaken on their behalf.

But I will give the defining statement of this report to Atlas Master Trust

“It isn’t possible to ignore the fact that investing in the global economy necessarily contributes to the environmental threats that our planet faces – global warming, deforestation and desertification, pollution, species extinction, extreme weather patterns and rapid exhaustion of natural resources”

Do we have to be told?

We are going to save this planet when we want to, not when we’re told to and until the trustees – who own the assets of these trusts become aware of their responsibilities, no amount of regulation will be enough.