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Laurence Julius, Independent Trustee, is speaking at the ESG Investment Leader summit in September. You can see the agenda and register to attend here.

What are some of the challenges trustees face when it comes to setting ESG and climate goal strategies?

Where does one start? Every pension fund will invest in a diverse range of assets. For some like direct investment in infrastructure projects, the position is easy to understand but when it comes to investments in equity and credit funds, it can be opaque.

Many investment mandates were put in place before climate change had its current level of focus.

Asset managers have been slow to embrace a holistic approach to Climate Change and ESG. It is not usually a natural part of their DNA. All too often there will be a slide at the end of their deck showing how their portfolio has improved on ESG factors against an index but when you ask questions you get superficial answers.

“Asset managers have been slow to embrace a holistic approach to Climate Change and ESG.”

Important research by McKinsey concluded that the best “Climate and ESG” performance was in companies transitioning from old ways to new ways, but I am still to hear this from an  asset manager.

Measuring ESG on a credible consistent basis is a nightmare – are nuclear and gas green? Why is Exxon replacing Tesla in an index? Does the Index measure genuine performance or have companies thrown their dirty businesses next door by selling them on?

What should fund managers do to help the pension funds they work with on this?

My plea would be for the industry to adopt global, consistent standards for definition and measurement.

It should ideally devote a narrative section of the changes in the performance and what drove it and identifying the main drivers of its improvement. The main benefit of this is that in order to write this section they will need to consciously understand their portfolio and the climate / ESG drivers.

“My plea would be for the industry to adopt global, consistent standards”

And this should be supported by some simple analysis

• Big Oil Co – disposal of dirty assets                                           +0.04
• Big cement Co – increased use of slag and waste materials +0.03
• Industrial Co – switch away from gas due to Ukraine war    -0.07

As smaller pension funds are likely to be buying standard units, how does this effect ESG challenges?

As a trustee, you are going to “expert investment managers” to invest your funds in line with your investment strategy in order to meet present and future pensions obligations. You must never lose sight of this.

You have to accept you will be invested in pooled funds and these will not be bespoke and that you have to manage the cost.  Every pension fund will want something slightly different and it is just not cost effective for the industry to provide this.

“You should challenge your investment managers at review meetings to explain the approach to climate change”

You must be careful in your investment mandate not to over proscribe how the investment managers invest your funds but give them the leeway to operate.

You should challenge your investment managers at review meetings to explain the approach to climate change and ESG to ensure this is high on their agenda and not a box ticking exercise.

Investment managers are keen to listen to what their clients need – and the more they hear the message, the quicker it will become part of their core DNA.

Laurence Julius, Independent Trustee, is speaking at the ESG Investment Leader summit in September. You can see the agenda and register to attend here.

 

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