Responsible Investment: The Rising Tide

From October last year, trustees have been legally required to ensure that their statement of investment principles (SIPs) have been updated to include their policies on environmental, social and governance (ESG) issues as well as including an allowance for stewardship considerations. From October this year, further requirements will apply which will require planning and decisions from Trustees in Q1 and Q2.

New requirements for 2020

From 1 October this year:

• Trustees of DC schemes will be required to produce and publish an implementation statement setting out how they have acted on the principles set out in their SIPs, including on stewardship.  That statement will need to be published on a publicly available website and be signposted to members in annual benefit statements.
• SIPs for all schemes must include details of how the arrangements with asset managers incentivise them to align their investment policies with the trustees' policies and how the trustees monitor and evaluate the managers' performance in line with these policies.
• Trustees of DB schemes will be required to publish their SIPs on a publicly available website (this already applies to DC schemes with SIPs).

The creation of a website has a lead in time for design and planning.  Will it be hosted by an existing employer website or standalone?  Will other information be included, such as the scheme accounts and member booklet?  Will there be a member only section requiring a log in?  These are questions which trustees should be considering now.

New requirements for 2021

From 1 October 2021:

• The implementation statement that DC scheme trustees are required to produce must also include a statement on how the trustees' policy on stewardship has been followed during the year and a description of the voting behaviour by, or on behalf of, the trustees.
• Trustees of DB schemes required to produce a SIP must produce an implementation statement which contains information on how the trustees' policies (as set out in the SIP) have been followed during the year and a description of the voting behaviour by, or on behalf of, the trustees.

Recent developments

A recent survey carried out by the Society of Pension Professionals has found that many trustees have treated the new legislative requirements as a box-ticking exercise.  That survey noted that 38% of trustees have made changes to their SIPs so as to comply with the new requirements, but have not actually made any changes to their investment portfolios.

ESG and stewardship issues will inevitably become more prominent for trustees given the increasing attention given them by regulators and the public alike.  The new requirements coming into effect from October this year and October 2021 will place all trustee boards under greater scrutiny.  It is not difficult to see how activist members and lobbying bodies, like ClientEarth, will use the information that schemes are required to publish to hold trustees to account for how they have discharged their stewardship obligations.  Those trustees who can show well-thought out engagement with ESG issues will be best able to discharge, and show they have discharged, those obligations.