Pressure set to build on Pension Fund Trustees to make socially acceptable investment decisions

by Andrew Adie, Managing Partner

Pension Schemes don’t usually expect to get environmentalists excited but they’re currently finding themselves on the front-line of the ESG battle, and they’re fighting on a number of fronts.

This week the Universities Superannuation Scheme (USAS) announced that it would start to divest its holdings in tobacco, thermal coal and some types of weapons. This partial ESG victory (it will inevitably result in some calling for it to go further) matters because the Scheme is vast, it manages $84 billion in pensioners’ assets.

It also matters because it reflects a wider trend that we have seen across the corporate world and which is keeping many pension trustees awake at night. What should they do as stewards of their Members funds when it comes to ESG?

Pensions Minister Guy Opperman has called for pension funds to be used to boost ethical investing, and the Environment Audit Committee, in May last year, wrote to the UK’s top 25 pension Schemes asking for details on whether the Trustees  incorporated climate change risk into their investment decisions. The committee then published the letters from Schemes piling more pressure on the Trustees.

The challenge for many Trustees is they have a fiduciary duty to get the best returns. Pre Covid, oil companies and sin stocks were a fairly reliable source of income and growth and adopting an “ethical” investment policy was seen by many Trustee boards as fraught with risk.

Caught between two stools, they had to navigate their way through an environment where many of their Members would support a more ethical investment policy, legislators and activists expected these schemes to be beacons of best ESG investment practice yet they also faced the reality of being mandated to seek the best returns.

The size of assets held by pensions Schemes is vast. Figures from the Thinking Ahead Institute put the AUM for the world’s largest pension schemes at around $18 trillion in 2018.

Pension schemes can exert enormous pressure as stewards of capital and their investment decisions can accelerate the growth of ESG investments (and companies that adopt purpose and ethical strategies).

Another curve-ball that comes into the mix is the report from the Financial Times this week which flagged that the Covid-19 recession will be the first where ESG has played a role. The article charted the views of various analysts who predict that corporates will not rush to reinstate dividends post-the crisis as they will be expected to meet the needs of a wider range of stakeholders, not just shareholders: Why reinstate dividends when instead you could save jobs, fund community projects or invest in technology that cuts the environmental footprint of your operations?  

For pension Schemes that reality brings further concerns and potentially more headaches. If sin stocks and polluters reinstate dividends and see stronger equity recovery, which way do Trustees look: To medium term returns or long-term ethical investing?  

Ultimately Trustees have to make judgement calls on what represents the safest way to safeguard Member funds and protect the retirement income they expect to receive. De-risking investments is key and now funds will be expected to have an eye to the risk of future pandemics as well as man-made climate change.

The USAS announcement mirrors similar moves across the corporate world to divest from hydrocarbon and “sin stocks” and as we face a world post-Covid the demand from activists, calls from legislators and Members for a more socially responsible and ethical approach to investment and business is only likely to grow.