Inside view: Balancing ESG reporting and stewardship

Much has been made of the need for responsible investment to climb up the corporate agenda – and rightly so, says David Russell, head of responsible investment at the Universities Superannuation Scheme (USS).

As a pension scheme, an asset owner as well as an investor, more of us than ever are putting ESG considerations at the heart of our investment strategies and that can only be a good thing. Society at large as well as policymakers and the members we serve see this increasingly as part and parcel of being good corporate citizens doing our bit to encourage good behaviour from our investee companies. 

USS is among them. We set out our first responsible investment policy (RI) in 1999 and recognised in 2001 that climate change was becoming more and more of a risk to the returns we need to generate from our investments in order to pay pensions. And we have a team of six focused purely on the ramifications of investing responsibly. 

Because we invest most of our assets directly through our investment management business, that means carrying out due diligence on acquisitions, regular interaction with the companies and funds in which we invest as well as benchmarking and other activities to make sure we keep pushing to reduce our impact on the environment. 

Keys to industry success
We have always believed that engagement and investor collaborations are the keys to industry success in terms of RI. Our statement on RI details the belief that integration of ESG factors into decision-making and engaging as long-term owners both reduces risk and positively impacts fund returns. As part of that commitment, we played key roles in the creation of the Institute Investor Group on Climate Change (2001), the UN-supported Principles of Responsible Investment (PRI) in 2006 and the Transition Pathway Initiative (TPI) in 2017. And it is through collaboration with our industry peers that we have seen successes with our engagements including the Climate Action 100+ group work in encouraging Royal Dutch Shell on its ambitions to achieve net-zero.

While USS and other institutional investors have been moving in the right direction, however, we have also seen a huge increase in the push toward more reporting and disclosure from regulators and other industry bodies. This is both very positive in that it encourages best practice and a commitment to taking ESG more seriously, but there are also downsides. 

On the plus side, we know that, as an industry, we need to get better at communicating what we are doing in terms of RI to customers and members. At USS, for example, we have a very large membership numbering more than 450,000 in the academic community who are very passionate about this subject. When we announced earlier this year that we were divesting on financial grounds from certain sectors such as tobacco, the feedback we received from member engagement was markedly high – demonstrating how much they care about this subject. 

And to this end, we also provide the range of reporting that has come to be expected from investment manager and asset owners. We already produce a scheme-wide annual report, a Responsible Investment Report, a Taskforce for Climate-Related Financial Disclosure (TCFD) report, and a PRI report as well as providing regular updates through web and social media content on this subject. 

Additionally, we go the extra mile in providing voting data on our website in a searchable database, something we are surprised that not all fund managers are willing or able to do. We also actively engage with member groups who want to understand our strategy in more detail.

Balancing the load
Being transparent and encouraging dialogue on this subject is something which we are fully supportive of. But while we believe we do a great deal to further the understanding of how we address ESG within the scheme, we envisage a tidal wave of further reporting to come and our concern is now whether the increased reporting burden may have now gone too far.

We do agree with the spirit of openness and transparency, but we believe there is an urgent need for greater coordination among government departments, and between regulators and industry bodies to ensure there is a more joined-up approach with regards to the various requirements and initiatives. 

To put this into proper context, we have identified the following list of mandatory and voluntary codes that we will be expected to report against. These include:

  • Shareholders Rights Directive II: SIP and the Implementation Statement
  • Occupational Pension Schemes (Investment) Regulations 2005 
  • Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 
  • Pension Schemes Bill 2019-21
  • ESG Disclosure Regulations 
  • ESG Taxonomy Regulation
  • MiFID II
  • DWP Climate Change Regulations (TCFD Reporting) 
  • FRC Stewardship Code
  • UN Principles for Responsible Investment
  • FRC Review of Climate Change Reporting

And there have been multiple consultations over recent months on ESG-related disclosure such as the DWP’s consultation on taking action on climate risk, which proposes disclosure of targets and metrics for assessment of climate risks and opportunities in line with the recommendations of the TCFD.  

Now, clearly a lot of this thinking does need to take place and should become part of how we, as long-term stewards and asset owners, look after the pensions entrusted to us by our members. But all that said, time spent reporting is time not spent in acting as stewards of the assets we hold, supporting integration activities with our fund managers, or monitoring our external fund managers.  And let us also not forget that all this reporting adds up to a cost ultimately borne by members. That means more expense for them and less returns generated by us as an industry. 

What we urgently need is joined-up thinking between regulators and other reporting requirements. For example, the PRI has aligned its reporting framework on climate change with TCDF requirements. That means that there is both clarity in terms of benchmarking and reporting but also using similar data, so reducing the need for duplication of effort.  

We absolutely believe that institutional investors and asset owners need to take ESG seriously and that reporting requirements are a direct way to encourage the right kind of behaviour. We just have to be careful to avoid a future where costs and time spent on reporting outweigh the benefits.

© 2020 funds europe



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