The impact of covid-19 on pension schemes’ adoption of ESG

LCP's Claire Jones explores the changing attitudes towards ESG among trustees during covid-19 crisis

Claire Jones, partner and head of responsible investment at LCP and editorial panellist for ESG Clarity, explores the changing attitudes towards ESG among trustees during covid-19 crisis

UK pension trustees’ interest in ESG had grown significantly over the last few years. By the start of this year, it felt as though ESG had gone truly mainstream and 2020 was expected to be another year with a big emphasis on ESG. But, in the wake of covid-19, has this been thrown into disarray?

The first thing to recognise is that, despite some high-profile and commendable exceptions, most UK pension schemes are at a fairly early stage of their ESG journey. For many of them, the turning point came when regulatory changes required them to update their Statement of Investment Principles (SIP) to include policies on ESG factors and engagement by 1 October 2019. Having met that deadline, trustees turned their attention to implementing their new policies, spurred by further regulatory changes that will require them to publish an annual report online demonstrating how they have implemented their SIP (although defined benefit schemes only need to report on their voting and engagement policies).

So far, in my experience, most trustees have focused on understanding how their investment managers are taking account of ESG factors and exercising stewardship. More conversations about ESG have been taking place, with trustees asking their investment consultants for their assessment of the managers’ approaches and discussing that approach when managers attend trustee meetings.

There has been relatively little movement in capital to date, with most trustees wanting reassurance that their managers are already following good ESG practices and are improving them over time. However, when updating their SIPs last year, a significant minority of trustees expressed a desire to learn more about specialist ESG funds in 2020, with particular interest among defined contribution schemes due to their younger membership and hence greater allocation to growth assets.

Climate change was expected to be a key theme in 2020, partly due to the COP26 climate talks and partly due to new trustee guidance that had been promised. I was at the PLSA Investment Conference in Edinburgh on 12 March when Guy Opperman, the Pensions Minister, launched the consultation on that guidance. He made it clear that schemes must act on climate change, that this would soon become a mandatory requirement (at least for larger schemes) and that he expected the Pensions Regulator to move quickly when trustees weren’t doing enough. But, with the number of covid-19 cases creeping upwards, the audience’s attention was already starting to turn elsewhere.

In late March, pension schemes rapidly amended their priorities, focusing on key questions such as how the sponsoring employer is being affected by the crisis and the implications for their future financial support of the scheme. There were also immediate practical issues to be addressed such as ensuring core pension administration services are continuing, clarifying pension contributions in respect of furloughed employees and considering requests from the employer to suspend deficit reduction contributions.

ESG is therefore a lower priority at present, particularly for schemes with distressed employers. Due to the constraints of online communications, trustee meetings have become shorter, with non-urgent topics deferred. However, since day-to-day consideration of ESG matters is mostly delegated to investment managers, trustees expect that to be continuing as before – with appropriate shifts in the balance of ESG topics considered. Once they can turn their attention back to ESG, they know there will be plenty to discuss, such as how ESG factors have been affecting their portfolios’ performance and the engagement their managers have had with investee companies during the crisis.

I do fully expect trustees’ focus to return to ESG as and when the current crisis starts to ease. Support for ESG had reached critical mass before the crisis and early analysis suggests that the ESG thesis has held up well during the market turbulence. The previous drivers of interest in ESG are still there, even if currently less visible – the seriousness of the climate and biodiversity crises, the strong regulatory and ministerial backing, and the pressure from pension scheme members for their pension to be invested responsibly. Moreover, the importance of social factors to economic and financial outcomes has never been more salient and the call to “build back better” is growing.

I think it’s safe to say that ESG will be back on trustee agendas soon and investment managers should ensure they are ready to resume the discussion.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...