Trustees shouldn’t treat ESG as a tick-box exercise – they’ve got the power to drive real change

I’ve been a trustee for six months now, and even in that short window I’ve seen a huge shift in attitudes towards climate change risk amongst companies and investment managers.

One of the standout companies making waves in this space is BP, and next week I’m delighted to be discussing the issue with Sarah Faivre-Ovion, the energy company’s Head of Investor Relations, in a webinar for AON’s Responsible Investment Network. https://retirement.aonunited.com/AonsResponsibleInvestmentNetwork_WebInvite

The title of the webinar is “Investors as a driving force for change”, and Sarah, Tim and I will be exploring how ESG issues have risen up the agenda, and how investors can influence the companies they invest in through effective engagement and stewardship of the funds under their management.

The power of engagement is something I have been thinking about a lot, how as an investor I can reach through the layers of advisors and investment managers to the companies I am investing in and make sure they understand our own net zero ambitions.

While a lot of the focus of recent regulations centres on reporting on voting and engagement, boards need to think hard about how they handle ESG and climate change. Come at it purely from a risk perspective - because you have a fiduciary duty to manage risk – and you might be led down the divestment path; whereas if you want make a real impact on improving the carbon impact on the real economy then engagement has to be the focus.

For large schemes - or those with a good governance budget and an engaged sponsor – engagement is worthwhile, and examples like BP show where we are starting to see some real change as a result of this.

But the challenge is for smaller schemes who don’t have the same level of governance budget or resource. These schemes will typically invest via pooled funds and will have no ability to direct the manager on how they invest or the criteria they use. As investors they are likely to meet with their managers infrequently, and be reliant on advisors, as well as standardised reporting and ESG ratings, to assess the carbon impact of their portfolios.

One option for smaller schemes to increase their ability to influence companies is to make their investment manager is part of a group such as http://www.climateaction100.org and even consider joining themselves. I know that BP and others engage regularly with the group, and it’s clear that the leverage that they exert on behalf of their members – married to a consistency of approach and clear messaging – will help drive progress more quickly than small schemes trying to act alone.

But there is a risk that we need to be conscious of. And that is that trustees select a manager that is a member of a group like Climate Action 100+, and consider it job done. There is so much more that we as trustees can do to keep up the pressure on managers to act in alignment with ESG goals.

For example, in a recent absolute bond manager selection exercise I challenged the finalist firms on whether they could provide real examples of where their engagement activity had brought about change in corporate behaviour. I asked them whether their investment team’s performance and remuneration are linked to climate metrics with a net zero goal. 

The manager that won was able to not only demonstrate both of these, but also go one step further to demonstrate how they quantified ESG and climate risk internally and compared this to the return potential of the investment. That is the key for me. I don’t want to invest members’ money in companies where we are not being compensated for the risks being taken, and climate risk is currently not factored into market pricing.

If we’re going to create lasting and meaningful change, trustees need to ensure that they don’t just tick the box on climate risk, but they keep the pressure on all of those with the power to influence investment decisions.