Home / ESG / Trustees take the gloves off over ESG

Events of the past two years have led to many changes. In the investment world, perhaps none is more apparent than a new level of activism by pension funds. Managers and investee companies beware. At a plenary session at last week’s PRI Digital Conference (October 18-21), ‘Fund Governance for the Next Generation’, representatives of three big funds told of their changing relationship with fund managers on issues to do with ESG and engagement. Angela Emslie, one of Australia’s most influential players in the profit-for-member super space, said: “The balance of power has shifted markedly from asset owners being mandate takers to being mandate makers. It’s been 30 years since compulsory superannuation was introduced and we’re now getting towards maturity.” She said that some funds, such as HESTA, of which she was a trustee director for 24 years, finishing as chair in 2018, were thinking about what it meant to be a “universal owner”. The notion of big funds as universal owners was first floated by Roger Irwin in 2011, when he was head of investment consulting at Willis Towers Watson. He founded the Thinking Ahead Group for the firm and later co-founded the independently financed Thinking Ahead Institute. Universal owners are fiduciary funds which are so large that they have an obligation to society and the world which goes beyond their investor or membership base. The discussion about responsible investing, which Emslie first became involved with in the late 1990s at HESTA, now a A$56 billion fund, had sped up over the past 18 months, she said. “The time has come when asset owners who don’t take it seriously will be left behind.” She said that trustees were clarifying their duties, having started with a relatively narrow view, such as being active in shareholder voting and, in HESTA’s case, introducing a special investment option for ethical investment-aware members. This option had turned out to be one of the fund’s best-performing over the years. “Now, trustees are thinking about the world into which the members retire,” she said. “The beneficiaries will be with us for a very long time. They may well have a nest egg but if they don’t have adequate housing and can’t breathe the air, we haven’t given them an adequate retirement. We are venturing into new territory.”

The PRI conference session, chaired by Laura de Ornelas, PRI’s director of asset owner empowerment, included other panelists: Arjen Pasma, the head of risk and compliance at PGGM, the 268 billion euro (A$312 billion) manager of several Dutch pension funds with a total membership of 4.4 million; Doug McMurdo, the chair of the UK Local Authority Pension Fund Forum, which has eight investment pools and speaks for about US$350 billion (A$470 billion); and Sara Bernow, a partner at McKinsey & Co. Emslie is currently a member of HESTA’s impact committee, a director of Frontier, PRI and State Trustees of Victoria and a former trustee director of Care Super, Vision Super and president of AIST. PGGM’s Pasma said the manager’s fiduciary duty was to invest for the long term and also to invest properly. “Having a good pension is not just about having maximum returns, it’s also for the world to be livable,” he said. “The standards applying to ESG are getting higher and higher. We have to adhere to them, and we expect the same from our managers.” The mandates stipulated the investment objectives and what was a favourable pension outcome for the funds. “It’s not a short-term goal,” he said. “We need to compensate managers well, but their goal is out objectives. We have to be specific about what we require.” He added his voice to those who are calling for better data and retorting standards for ESG. Pasma said that in terms of having good data, especially with ESG and climate change considerations, the industry was still at the beginning of what was required. His “blue sky vision” was to have the interests of the governance, trustees, pension fund management and fund managers aligned. “We think you should have more specific risk appetites set on behalf of trustees and asset managers. It’s about much more than reputational risk,” he said. “To some, ESG policies mean trouble and having protestors at your door. Trustees and asset managers need to step up. We have to make decisions and take a stand. In an ideal world I think we should take a much more active approach and take more risk around ESG.” Emslie said that asset managers were not incentivized for real world outcomes. They were incentivized to produce alpha, not beta. “Climate change is clearly a front-runner, but this means that relationships between asset owners and asset managers will become much more complex. We’re talking about systemic issues, and they require multiple reinforcing actions to occur.” The UK Local Authority’s Doug McMurdo said there should be further collaboration between funds. His organisation had worked with HESTA, for instance, on the RIO Tinto excavation scandal in Western Australia, where ancient Aboriginal sites at Juukan Gorge, WA, were destroyed in 2020. Simon Thompson, the company’s chair, resigned this year over the matter, along with several executives. “We need to challenge companies at the chairs’ level,” McMurdo said. “We should tell them what we want in their resolutions. We can help draft them.”