Purpose on Payday: SEC Newgate's view

By Andrew Adie

September saw the loss of Her Majesty Queen Elizabeth II. Her life of extraordinary service saw her celebrated as one of the world’s greatest-ever leaders, reinventing the Monarchy and leading 70 years of momentous change in the UK and Commonwealth.

In a life of breaking barriers while preserving tradition she leaves many legacies. One that continues to evolve and will live and grow for centuries to come is the Green Canopy project, to gift and plant 3 million trees across the UK. It is something that this nation needs more than many realise, given we have only around 13% of the UK’s landmass covered by trees, one of the lowest levels of any European country (where the average is around 35% tree coverage).

She (and the Duke of Edinburgh) also shone a spotlight on the need to preserve, and work with, nature. That legacy is carried forward by King Charles III and the Prince of Wales who are both leading advocates for the environment and the need to save the planet.

The sober yet orderly transition of leadership from the late Queen to our new King has stood in stark contrast to the other transition happening in the world of politics.

The new Government ushered in in the face of soaring energy bills, a cost-of-living crisis and concerns that the environment was being side-lined for more immediate issues found itself mired in a crisis derived from its fiscal solution to the problem.

If there was any doubt that politics, the economy and the ESG movement were inextricably linked then September would have dispelled that belief.

While Government support to help address the impact of rising energy bills on consumers was needed and welcome, the market reaction to the tax cuts and apparent relaxation of fiscal discipline (and the lack of reassurance that would normally have come from having institutions such as the Office of Budget Responsibility ‘run the rule’ over Government sums) led to a sell-off of gilts, a devaluation in the pound and further inflationary pressure.

This has resulted in the ‘G’ (governance) in ESG making a rare foray into the spotlight.

Defined Benefit pension funds faced cash calls as the value of gilts dropped which would have forced many into unplanned asset sales, weakening their funding and driving the price of gilts still lower.

Pension schemes place governance at the heart of their operations, they are cautious, conservative and driven by a clear purpose – to pay the pensions (and meet the liabilities) of those people, their members, who rely on them to provide a retirement income.

Unexpected surprises and fiscal crises derived from political decisions are not what pension schemes ‘do’ and the market reaction prompted these often ignored institutions in the UK’s financial life to act decisively, calling on the Bank of England to step in and steady markets.

Much of the criticism of the Government’s ‘fiscal event’ has revolved around the fact that they failed to give enough detail on the calculations behind the policy announcements and failed to give the markets enough time to digest the intention. The Government countered that saying it had no choice but to act fast.

The upshot is that good governance, transparency and the role of the UK’s financial institutions, regulators and markets is again in the spotlight. It would be a brave politician who didn’t draw lessons from the events.

While the UK has been grappling with governance surrounding how to structure and communicate fiscal changes, in the US the spotlight has also been on governance but governance of the fund management industry itself and the way that it classifies investments as ‘ESG’ compliant.

A group of Republican senators, led by Senator Pat Toomey (ranking member of the Senate Committee on Banking, Housing and Urban Affairs) wrote to some of the largest ratings agencies demanding they give details of the methodologies they use to assess ESG ratings for businesses. The move is the latest development in a spreading scrutiny of ESG investing by Republican politicians.

Blackrock has defended its stance on ESG after 19 Republican state attorneys accused it of placing ‘activism’ ahead of fiduciary duty by investing using ESG metrics, which the politicians say is risking the returns for State Pension Funds (which won’t be able to invest in SIN stocks and equities that don’t fit ESG criteria). It follows an ongoing campaign from the State Financial Officers Foundation that is calling for State pension schemes assets to be withdrawn from funds that won’t invest in fossil fuels. Given that fossil-fuels companies are seeing record returns and rising share prices the argument is that by failing to invest in them, ESG-focused fund managers are risking the returns for pensioners – and thus State Pension Funds are accused of failing to deliver their fiduciary duty by allowing ESG investing criteria to be used.

Blackrock has defended its stance on ESG and reiterated its belief that climate change poses a significant risk for investors and that assessing investments using ESG criteria reflects shareholder votes.

September has also seen ongoing tensions with Russia over its war in Ukraine intensifying, with gas leaks emerging from saboteur attacks on the Nord Stream pipeline and ongoing debate around how we strengthen energy security and invest in renewables to reduce reliance on Russian energy.

Building a resilient, renewable future is apparently one of the aims of the Government’s review of the net zero agenda, which will look at how the UK delivers net zero by 2050 while also delivering against other criteria, such as growth.

As we move into October and the chill of late autumn forces more people to confront the reality of rising energy bills then the political need to act in the interests of both citizens, economy and the environment will continue to rise up the agenda. The way that this is achieved and the governance processes surrounding it will also remain in clear focus.