Getting up to speed on responsible investment
5 March 2019
Do you know the difference between the ten principles of the United Nations Global Compact and the PRI’s six Principles for Responsible Investment? How about the FRC UK Stewardship Code and PLSA’s Stewardship Disclosure Framework?
I think it's safe to say that responsible investment is an area which can seem overwhelming to most people when they first look into it.
So why bother? This is a subject that has been around for a long time in one shape or form. Isn’t this just a rebadging of the same old stuff?
Well things are different this time round. It is now recognised that integration of environmental, social and governance (ESG) factors and good stewardship of investments, can have a financially material and beneficial impact on investment returns. In addition, the DWP has introduced new legal requirements with which trustees, of all but the smallest schemes, will need to comply. The key requirement means that trustees will need to update their Statement of Investment Principles (SIP) by 1 October 2019 to state their policy on several aspects of responsible investment, specifically:
- financially material considerations, including (but not limited to) ESG considerations, including climate change;
- non-financial matters such as taking into account members’ views on ethical issues and quality of life; and
- engaging with investee companies and the exercise of their voting rights.
Boilerplate wording is strongly discouraged. Trustees need to consider and debate these matters and form a policy which matches their beliefs. This policy should be split between those matters that are financial and those that are not. Climate change has been singled out for a special mention because it has wide-ranging impacts and is a current priority for financial regulators.
Most trustee boards will have only two or three meetings between now and when the new requirements come in on 1 October. That's not long to receive training, discuss beliefs and agree a policy. Good luck!
When the finalised requirements were announced in September 2018 we were expecting TPR to provide guidance for trustees that November. This has not yet materialised and we now understand this will follow in spring 2019. However, you don’t need to wait for this guidance before starting your discussions.
What should trustees do next?
We have developed a six-step process to take you through the process in a collaborative way. We don’t believe there is a one-size-fits-all answer to meeting the new requirements as we anticipate trustees will have a wide range of views on the subject.
- Step 1 – Agree general policy on ESG considerations
- Step 2 – Review any existing polices on individual ESG or ethical considerations
- Step 3 – Consider position on climate change
- Step 4 – Consider new policies on individual ESG or ethical considerations
- Step 5 – Agree voting and engagement policy
- Step 6 – Document and implement agreed policies
Further details on each of these steps can be found in our guide Developing your responsible investment policy for the SIP. That's not all; for more resources, visit our RI hub which brings together our main responsible