Over the past few years, pension trustees have been under pressure to take account of environmental, social and corporate governance (“ESG”) factors when setting out their approach to investments. This pressure stems from legislative and regulatory changes, groundswells of support for a ‘greener’ world, and, most recently, the Make My Money Matter campaign (“MMMM”).
What is the ‘Make My Money Matter’ campaign?
MMMM is “a people-powered campaign”. Its main objective is to ensure that individuals understand how their pension savings are invested and how that investment power can be used to “build a better world”. MMMM hopes to do this by demanding that more (if not all) pension savings are invested in businesses that “do good” (for instance, by building wind farms, curing disease, making homes and driving innovation), rather than being invested in “harmful industries like fossil fuels, tobacco, and arms”.
Individuals can support the campaign in a variety of ways, such as by signing a petition or by using template social media posts to put pressure on entities involved in the pensions industry. One of the most direct ways an individual can get involved is by sending a version of a template email to their employer and/or pension provider. These emails question how ESG factors and climate risks are taken into account in the individual’s pension fund, and enquire as to what plans are in place to increase “investments that are good for our planet, our society, and our economy.” The emails also request that recipients share their plans to achieve net-zero emissions.
Organisations can also sign up to the campaign – in fact, MMMM has even created an employer-specific toolkit to help employers work with their pension trustees and providers. A host of high-profile organisations have signed up already, including the WWF, Comic Relief, BNP Paribas and pension providers such as NEST, PensionBee and the Environment Agency Pension Fund.
What does this mean for Pension Scheme Trustees?
Increasing focus on ESG
Recent legislative changes have brought ESG into the spotlight. Since October 2019 trustees have been required to include in their annual statement of investment principles:
- their policy in relation to "financially material considerations", which includes ESG considerations (specifically including climate change);
- the extent (if at all) to which they take into account "non-financial matters", meaning the views of their scheme members (including their ethical views); and
- their stewardship policies.
From this October trustees of defined benefit schemes, as well as trustees of defined contribution ("DC") schemes (who are already required to do so), will need to publish their statement of investment principles online. Trustees will also need to publish implementation statements setting out whether they have achieved their investment goals.
Proposed amendments to the Pension Schemes Bill 2019-21 may require trustees to assess and manage their scheme’s exposure to the climate emergency and publish information relating to the effects of climate change on the scheme. The Government is currently consulting on its proposals for these climate governance requirements.
The Government’s current proposal is that the 100 largest occupational pension schemes – those with £5bn or more in assets and all authorised master trusts and collective DC schemes – will have to publish climate related disclosures by the end of 2022. Pensions Minister, Guy Opperman, told the Society for Pension Professionals in September that the ESG agenda, alongside the Pension Schemes Bill, are his top priorities.
Societal pressure for institutional investors to ‘go green’ has also been mounting, particularly since mass protesting started back in September 2019. There is also some research to suggest that support for responsible investment may grow as a result of the COVID-19 pandemic. The Defined Contribution Investment Forum found that 82% of DC scheme members surveyed believed that the COVID-19 pandemic will change society forever and 80% would like the way their pension is invested to do some good as well as provide them with a financial return.
In some respects, therefore, MMMM is a continuation on this theme and encourages individuals to pose many of the same questions that trustees also need to consider.
Balancing ESG factors and fiduciary duties
Some trustees may be concerned that changing their investment approach would be in breach of their fiduciary duty to act in the best interests of their scheme’s beneficiaries. In 2014 the Law Commission published a report on the fiduciary duties of investment intermediaries, clarifying that “trustees should take into account financially material factors” when making investment decisions. The investment legislation has made clear that trustees are now required to have a policy regarding ESG factors where the trustees consider these are financially material.
However, that is not to say that all ‘moral’ causes are worthy of pension schemes’ investment or that all investment decisions should communicate approval or disapproval of certain industries. The Law Commission distinguishes between financial and non-financial factors. If pension trustees wish to take into account factors which are not financially material, they should:
- have good reason to think that scheme members would share their outlook, and
- anticipate that the decision will not result in financial detriment to their scheme.
Most trustees will have updated their investment principles to deal with the current legal requirements, but there are further changes on the cards, and trustees will need to continue to review their ESG and stewardship policies and the extent to which they take into account members' views. Building these factors into an investment profile whilst working with the constraints of fiduciary duties may be a tricky balancing act for many trustees. Obtaining comprehensive advice from their investment managers and legal advisers, considering the guidance published by the Pensions Regulator (and potentially external bodies such as the Pensions and Lifetime Savings Association and the UN Principles for Responsible Investment), and properly documenting decision-making processes will be key steps for trustees.
Engaging with MMMM
MMMM does present some new challenges for trustees. On a practical level, trustees must communicate clearly with their members on the kinds of issues raised in MMMM’s template email. This will involve working collaboratively with their administrators, investment managers and legal teams to produce comprehensive communications.
Trustees may also find they are under increasing pressure to take into account members' views in their investment decisions, which of course is one of MMMM's objectives, particularly now they are required to publish certain investment documents online.
What does this mean for employers and sponsors?
Increasing pressure to ‘go green’
Employers and sponsors have faced increasing pressure to ‘go green’ in recent years, particularly from their investors. No matter the industry, investors around the world are demanding socially and environmentally conscious options. This pressure has a tangible impact on businesses; a study published in January 2020 demonstrated how investors are willing to pay $0.7 more for a share in a company giving one dollar per share to charity, whereas firms that are socially harmful are valued $0.9 less than other companies which are socially neutral. It comes as no surprise, therefore, that individuals are also turning the spotlight onto how their pension contributions are invested.
Engaging with MMMM
Employers and sponsors may decide to partner with MMMM by pledging to commit to one of MMMM's core asks: (i) to align their organisation's pension with its mission and values, (ii) to tell employees where their pension money is going, or (iii) to ask their pension scheme trustees or providers how they "invest in people and planet".
MMMM has created a toolkit for pension pledge partners which sets out the practical steps required to align their pension with the values MMMM promotes. The toolkit contains information to guide discussions with trustees and pension providers, including sections on the business case for sustainable investing and how sustainable investing fits in with pension regulation and trustee duties. This might not be a particularly difficult conversation for some employers; research by Mercer in its 2020 European Asset Allocation insights report - which surveyed 927 institutional investor clients across 12 countries during the final quarter of 2019 and the first quarter of this year – found that 30% of schemes noted that they wished to align with their sponsoring company's existing corporate responsibility strategies.
To date, MMMM is supported by a host of high-profile individuals and corporate partners (including PensionBee and NEST), and has just under 4,000 signatures on its petition calling on UK pension funds to use their investment powers to build a better world.
Whilst MMMM is unlikely to cause an industry-wide shift on its own, increasing legislative and regulatory pressure means that trustees and sponsoring employers will have to focus on the role of ESG in their schemes' investment portfolios going forward.
Authored by Katherine Howe, Senior Associate, Hogan Lovells and Jade Rigby, Associate, Hogan Lovells.