The DWP consultation on clarifying and strengthening trustees’ investment duties has finished. If the DWP achieve their timeline the new regulations will become law in Autumn 2019. The proposed regulations will change business as usual for trustees and consultants alike and are a clear signal that ESG has moved to the mainstream.
Why has there been a consultation?
The DWP has rightly recognised that some confusion exists among trustees about exactly what considerations should be taken into account when exercising their fiduciary duties. It is the intended purpose of this consultation to take existing guidelines and recommendations, and use them to create the regulations that will reassure trustees on what they can, and should be doing.
How does it propose to help trustees?
- It provides the necessary clarity that environmental, social and governance factors, including climate change are likely to be financially material to nearly all schemes. It therefore requires trustees to form a policy on how these are taken account of.
- It highlights that in the trustees’ role of acting in members’ best interests, they should be exercising good stewardship, not just through shareholder voting, but also engagement and monitoring. Again, trustees will be required to have a policy on this.
- It requires trustees to state the extent they take account of members’ views and concerns on financially material factors like ESG, but also on the wider investment strategy including ethical considerations. It provides the framework trustees can use to build their approach.
What are trustees required to do?
In order to implement these new regulations, the DWP point out that the Statement of Investment Principles (SIP) is often an unloved document that is rarely used in the ongoing running of a scheme. They intend to change this by requiring all of the new policies be added to the SIP, and encourage this document to be used as a “real, effective and regularly reviewed guide to investment strategy”. For some schemes (mostly DC), this document will then be published online, followed by an implementation report 12 months later showing how trustees have acted on their new policies. Time to dust off your SIP.
Illustration of the effect of the proposals on different schemes
Source: Consultation on clarifying and strengthening trustees’ investment duties, The Occupational Pensions Schemes (Investment and Disclosure) (Amendment) Regulations 2018, June 2018
So what is Redington’s view?
We believe that the consultation is doing the right thing. By clarifying that ESG factors, including climate change are financially material will speed up the debate, and allow for more effective conversations on how they should be managed. This should lead to an increase in responsible investment across the industry, continuing the rise of this approach to the mainstream of investment analysis. So a thumbs up from us.
More and more ESG related headlines are hitting the press and these proposed regulations will take the topic from the niche, and launch it into the mainstream. Trustees will have to spend some meaningful time over the coming months to fill any educational gaps and increase engagement in order to navigate the future risks and opportunities.
There may be some future headaches for trustees caused by trying to find an effective way of assessing members’ views if direct consultation is not possible. However the regulations do allow for this, with the focus being on allowing trustees to act if they believe their members do hold certain views, but not forcing trustees where the views are less clear. Nevertheless, in both cases trustees will be required to add a statement to their SIP, which will at least put the conversation on the table, which we think is a good thing for members.
Change is not always a bad thing, especially not in this case where we believe the proposed regulations accurately reflect what needs to be done to shift the industry towards a more responsible approach to investment.