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Fred Berry – UKSIF Ownership Day

Published date: Wednesday 25 April 2018

Introduction

Thanks for inviting me to speak today on today’s theme of climate risk: the long and short of it.

It’s a pleasure to be here and share with you our perspective at The Pensions Regulator (TPR) and to welcome this climate checklist for trustees produced by ShareAction and UKSIF.

TPR’s role and trustees’ responsibilities

As you know, TPR’s role includes protecting members’ benefits and promoting the good administration of pension schemes. In our work we focus on pension scheme trustees.

Trustees are the first line of defence for members. Their role can be complex and demanding, combining responsibility for governance, administration and investment.

They have a significant responsibility in protecting the benefits of their members and we make no apology for expecting high standards of them when discharging their duties.

Now the long and short of it for pension scheme trustees is they are here to deliver good member outcomes, now and in the future.

Achieving this goal relies on effective management of the scheme’s investments. And as we’ve been hearing today the risks arising from climate change can impact trustees’ ability to meet these objectives both now and in the future.

That is why TPR welcomes tools like this practical checklist to help trustees and because it complements our own guidance in this area.

Trustees and climate change risk

Climate change and its associated risks impact business, markets and the economy in a number of ways.

Improving standards of governance and risk management are priorities for TPR and we specifically call out climate change in our investment guidance.

Despite this, many trustees seem behind the curve in understanding and assessing the impacts of climate change; some trustees are taking a leadership role but others are resistant to change or underestimate the potential financial impacts on their scheme.

In February this year we were called to give evidence to the Parliamentary Environmental Audit Committee (EAC), who holds government and non-departmental bodies like TPR to account against sustainable development and environmental protection targets.

The EAC were particularly interested in the physical effects of climate change and the impacts associated with a transition to a lower-carbon economy.

It heard evidence about how trustees perceive their fiduciary duties, how they are considering environmental, social and governance factors, and how some trustees are leading the way on considering and managing climate risk.

However, those giving evidence expressed concerns that many trustees are not doing enough to understand the potential impacts of climate change on their scheme’s investments and are risking good outcomes for members.

The inquiry heard that not all trustees appreciate the financial risks and opportunities presented by climate change; some are resistant to change or underestimate the potential financial impacts.

This is disappointing given our guidance and the work of ShareAction, UKSIF and others to raise awareness.

We therefore welcome the publication of this climate checklist. It’s to the credit of ShareAction and UKSIF that it has been created and we believe it will be useful, practical information for trustees.

Investment consultants

We also support UKSIF and the Association of Member-Nominated Trustees (AMNT) in their initiative asking investment consulting firms to ensure field consultants make trustees aware of TPR’s guidance on sustainability and considering ESG, including climate change.

Sixteen investment consulting firms covering over 85% of the pension market are signed up to this pledge.

We would expect these advisers to be working with trustees to consider risks to long-term sustainability and to embed ESG considerations into their decision-making and implementation.

Trustee governance and 21st century trustee

As you’ll be aware, raising standards of governance is the goal of our 21st century trustee work and our current theme is ‘Working well with your advisers and service providers’.

We know from our research that standards are patchy. Many trustees tell us they struggle to challenge the advice they receive or understand costs and charges for the services provided to their scheme. This is a particular issue for investments

Therefore we’ve been targeting trustees and advisers on a monthly basis; setting out clear standards.

We’re sharing case studies, demonstrating what ‘good’ looks like and providing tools for all trustees to help improve their governance.

So far we’ve covered some of the fundamentals of good governance; like the importance of clear roles and responsibilities and of having a skilled, engaged and diverse board led by an effective chair.

We want trustees to be asking themselves: Do we understand and scrutinise the advice we receive? Do we regularly review the performance of advisers? Do we understand the terms and conditions of contracts?

We want trustees to be self aware and we want them to take action; to retain sufficient oversight of tasks delegated to others and regularly review and manage performance.

We’d like all trustees to be asking themselves tough questions – are we complying with the basic requirements in law? Do we need to seek out independent or professional advice? Is our scheme sustainable? Is it sustainable for the employer too, or do we need to start thinking about consolidation?

They are difficult questions, but they need to be asked.

In creating this climate checklist ShareAction and UKSIF have developed another tool to help support trustees in the good governance of schemes.

Now I’ll hand over to Anne Marie from Share Action to tell us more about it.

fred-berry

Fred Berry
Head of Investment Consultancy

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