Salvus Master Trust | Comment
A perspective on ESG from a workplace master trust
Barry Parr
Barry Parr is an independent trustee of Salvus Master Trust
Most trustees are aware of the new obligations under the Occupational Pensions Scheme Invest- ment Principles Regulations regarding ESG issues. Related policies must now be published in the Statement of Investment Principles (SIP). Lesser known requirements fall under the Share- holders Rights Directive II (SRDII). These put a focus on stewardship duties and trustee incentiv- isation mechanisms, arguably presenting rela- tionship challenges between schemes and their asset managers.
Though financially-material factors must be con- sidered, there’s no obligation under the Invest- ment Principles to consider non-financial factors unless there are strong expectations that they represent specific views of the membership. Trustees aren’t generally equipped to judge the materiality of the multiple ESG factors across asset classes and territories. Even if they are, for all but the largest schemes, implementing that policy is challenging at best and unrealistic at worst. The key reasons for this are that most DC schemes are: – Investing via platforms and not directly hold- ing end investments; rather they are holding promises under an insurance structure.
– Investing through omnibus registration accounts alongside hundreds or thousands of other investors, making the representation of an individual scheme’s interests impractical.
– Investing in pooled funds. Even with the best desires of all parties, it often isn’t economically practical to execute individual scheme posi- tions. In some jurisdictions the consequential split voting may even be illegal.
– Investing in collective global passive funds. These align with the market indices and, argu- ably, to the extent that markets are efficient, then all risks including ESG factors are already priced in at any point in time.
Limitations can apply even if some members show strong views. Diverse memberships overall may typically mirror the views of the general pop- ulation; though some schemes may seek the rep- utation appeal that addressing specific ESG fac- tors or single issues might present. So other than when trustees identify a risk of real material impact, they must take care that their decisions truly represent the membership. Of course, where impact is clear and material then trustees may fully integrate their ESG prin- ciples within a scheme default, whilst others may prefer initially to adopt a filter or tilt. Other schemes may offer specific ESG structured funds as self-select options, meaning members with strong views can take responsibility for their judgements, beyond the more holistic perspec- tive required of the trustee.
Clarity around the standards with proven finan- cial impact remains weak. It’s illogical that views should differ markedly between schemes and managers. And as an industry we need to align in addressing specific horrors – of which climate change must be the front runner! Let’s look towards a collective set of accepted standards. We have seen seeds in the form of the UN Global Compact and so many others, but if we are not careful these simply become meaningless labels, or worse - marketing levies!
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Issue 88 | November 2019 | portfolio institutional | 15
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