We're proud to be a signatory to the Principles for Responsible Investment (“PRI”) and strongly advocate the integration of sustainability throughout investment process. With our annual PRI submission now complete, we take a look back at the last 12 months and consider what we’ve achieved. Principle 6, after all, requires us to report on our activities and progress towards implementing the Principles.

Responsible investment has remained high on our clients’ agendas given evolving regulatory requirements.  1 October 2019 was the deadline for UK pension scheme trustees to update their SIPs to incorporate stronger policies on responsible investment and stewardship.  Unsurprisingly, a considerable amount of effort was focused on working with trustees on policy development and building knowledge and understanding. Several clients also viewed this as an opportunity to focus on the longer-term sustainability of their pension arrangements.

1 October 2020 is a forthcoming deadline which again requires trustees to update their SIPs.  But this is also a date from which DB trustees will publish their SIPs and DC trustees will publish Implementation Statements.  We expect an increasing focus on stewardship and how managers are exercising, and reporting, on the responsibilities that many of our clients expect them to be undertaking.

Stewardship

Stewardship has been a significant area of activity for us as we completed our second, triennial Stewardship Survey during 2019, the results of which will be published shortly.  From the results of this exercise, we note that transparency needs to continue to improve and managers must work to make stewardship outcomes accessible to asset owners.  Managers also need to be clearer on the actions they will take in addressing climate risk as few have clear policies in place.

Manager assessment

Extending the work undertaken in previous years, we have also continued to build our own manager assessment processes, integrating responsible investment considerations into our ratings.  We’ve extended our research across all asset classes over the last nine months which gives us a strong platform from which to continue to build and promote more sustainable outcomes from asset managers. 

Climate change risk

Regulators have focused on climate change over the last 12 months with the Pensions Regulator urging pension trustees to “consider climate change as a core financial risk” and the recent publication of guidance by the Pension Climate Risk Industry Group provides a further impetus for pension funds to consider the impact of climate change on their pension scheme and their members.  We take the view that we should not shy away from talking about climate risks as this leads to understanding and action.  Our goal has been to start conversations with clients, helping them understand the potential consequences of climate change and begin to consider the different risks they’re exposed to, and the potential opportunities. 

Our climate scenario analysis has built on our existing asset liability modelling capabilities to illustrate how our clients’ future funding levels could be affected under three different climate scenarios.  We’ve not only considered the impact on asset returns, but considered broader economic and demographic impacts, drawing on the ‘Hot and Bothered?’ research undertaken by our Club Vita colleagues.  We’ve also approached climate scenarios in a way which is simple for our clients, using tools and language they are already familiar with, and we’re pleased that a number of our clients considered climate scenarios as part of their actuarial valuation exercises over the last year.

Work on climate scenarios is a rapidly evolving area.  We have therefore sought to socialise our thinking, presenting our approach at the PLSA conference in May 2019 and challenging others to consider next steps at a workshop that we organised in September 2019.  Building on this work, we’ve also created an internal climate change working group as we continue to build our knowledge capabilities in this complex area.

We have extended our consideration of climate issues beyond pension schemes.  We produced a ‘Climate ready’ benchmarking report, surveying participants in the Life Insurance industry on their readiness to meet the requirements of the PRA’s Supervisory Statement. We’ve also brought our work on climate scenarios to the wider market, having helped life insurers think through the process of developing their own internal climate scenarios to capture key exposures to insurance risk.

Beyond the theory, we’ve also worked with clients on the development and implementation of climate/ESG tilted investment strategies, particularly focusing on the integration of such strategies into the default arrangements of DC pension plans. We believe such approaches can improve long term outcomes for members by adding value not just from a financial perspective, but from positive engagement perspective too.

Education & engagement

One area which has been a particular focus for both us and our clients has been education.  Internally, we have run a number of well attended training sessions and have been pleased to host speakers from organisations including Carbon Tracker, Church Commissioners and Cambridge Econometrics alongside a number of asset managers. We’re also delighted to be able to offer our staff support in completing the recently launched CFA ESG qualification.

More broadly, we’ve recorded several podcasts which have initially focused on understanding the actions others have taken to address climate risks in addition to publishing various articles over the year, including a piece on the need to get under the skin of Sustainable Equity mandates.  

Climate change was a frequent feature of our external presentations during 2019.  In addition to our presentation at the PLSA conference, we have been pleased to cover the topic at numerous client training and industry events, including the Investment and Life Assurance Group (“ILAG”) Global Risks Seminar and the 2019 IFoA Life Conference.

Looking ahead

Building on previous years, we consider that we’ve had yet another responsible year in 2019.  Looking forward to the rest of 2020 and beyond, we see the focus on responsible investment continuing as asset owners look to implement and monitor their policies.  We will be focusing on how we can monitor practices and better hold investment managers to account for their actions, but also increasingly focus on the need for change.  Responsible investment cannot just be about ambition and we recognise the important role that we  play in turning ambitions into outcomes.

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