Does 'doing the right thing' equal conflict of interest? Discuss
It's all very well telling people they should invest responsibly but for some, the message of 'doing the right thing' causes inevitable conflict. Who are you to choose to do 'right' by? The Investor wanting maximum return for their money? The Pensioner wanting a better quality of life through their pension? The market wanting to keep stock prices high? The Directors wanting good bonuses to reflect their efforts?
The issue becomes especially taxing when you are charged with the responsibility for meeting that myriad of expectation. Never more so than for Pension Funds as this short essay from Jeff Houston, Secretary to the Scheme Advisory Board at Local Government Association and key speaker @RAOGlobal in Oct makes clear;
"In a defined benefit scheme like the Local Government Pension Scheme, individual scheme members and employers entrust their contributions to be invested in their best interests to ensure that sufficient monies are available to pay their pensions when they fall due. Making investment decisions has always been challenging but in recent years the challenge of sustaining the duty owed by those making investment decisions has been intensified by the extent to which environmental, social and governance (ESG) factors now impact on the financial sustainability of the entities in which LGPS funds invest.
ESG factors are just one of many considerations within the much wider arena of responsible investment that aims to incorporate all materially financial factors into investment decisions, to better manage risk and generate those sustainable, long term returns. Responsible investment therefore needs to be regarded as a holistic approach to manage risk and return across all investment decisions rather than as a tailored investment approach like, for example, ethical, sustainable and social impact investing.
The 88 Individual LGPS funds in England and Wales are responsible for over ￡280bn in scheme assets and have a responsibility to act as good stewards and to protect and grow those assets on behalf of scheme beneficiaries. The 2012 UK Stewardship Code defines stewardship as the promotion of long term success of companies in such a way that the ultimate providers of capital also prosper. Effective stewardship benefits companies, investors and the economy as a whole.
To meet all these challenges, the government has recently introduced a number of legislative measures but only in relation to those responsible for making investment decisions in trust based schemes. As from October 2019, trustees will be required to include in their Statement of Investment Principles new regulatory requirements including how financially material factors (including, but not limited to, ESG considerations, including climate change, over the time horizon of the scheme, are taken into account in the selection, retention and realisation of investments, the extent, if at all, that non-financial factors, for example, members’ ethical views, are taken into account, and engagement and voting activities in respect of investments, including stewardship.
By October 2020, trustees will also be required to include in their Statement of Investment Principles their arrangements with asset managers including how they incentivise their appointed investment managers to align investment strategy with their policies and to make investment decisions based on long term performance, and a form of implementation statement on their engagement and voting practices
Trustees will also be required to publish on a publicly available website both their Statement of Investment Principles and Implementation Statements.
Historically, the LGPS has, where appropriate, adopted pension legislation that has been introduced specifically for schemes based on trust law. The scheme has always striven to be a bastion of best practice and it follows that the Local Government Pension Scheme Advisory Board (SAB), established under the Public Service Pension Schemes Act 2013, will need to establish whether recommendations should be made to the department responsible for the scheme (MHCLG) to bring it into line, either wholly or partially, with the requirements on responsible investment that will apply to trustees from October 2019 onwards.
So how could this be achieved in times when securing a legislative slot is, at best challenging and, at worst, impossible. Statutory guidance issued by MHCLG in July 2017 already requires LGPS funds to include in their Investment Strategy Statement a statement setting out their policy on environmental, social and governance considerations but there is no specific requirement at present to include any policy statement on how the risks associated with climate change are taken into account in investment decision making. Unless changes are made to MHCLG’s statutory guidance to introduce such a requirement, the LGPS will be at a significant disadvantage compared to other schemes based on trust law and will lay itself open to criticism that it is failing to address the risks associated with climate change and putting future investment returns and pension payments at risk.
Over the coming months the Scheme Advisory Board will be drawing up a schedule of proposed amendments to MHCLG’s statutory guidance to ensure that the scheme reflects current government policy on issues like climate change and wider responsible investment considerations. These will then be given to the new Local Government Minister for consideration and, hopefully, implementation.
At the same time, the Board will be putting the finishing touches to guidance on responsible investment aimed at those responsible for making investment decisions The guidance, which should be published later this Autumn, will help decision makers to satisfy themselves that they are operating both within the current law and their duty to local tax payers and, if they wish, to follow the government’s direction of travel on key issues like climate change. It will also enable individual LGPS funds to see where they stand along the Spectrum of Capital and what they would need to do to should they wish to move further along that path.
To conclude, despite all that has changed in recent years with regard to responsible investment, we should never lose sight of the fact that the primary goal of any funded pension scheme remains one of achieving those long term financial returns to ensure that future pension payments can be met when they fall due. Combining this with the challenges associated with responsible investment will be no easy task for those responsible for investment decision making. As for the LGPS, the work being undertaken by the Scheme Advisory Board on responsible investment will help to ensure that the LGPS remains, as it always has been, at the forefront of best practice and investment decision making."