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Solomon, 2009

Executive summary

Pensions are among the most significant consumer products and investments purchased by society. Protecting pensions against material financial risk is crucial to the maximisation of social welfare. There is a substantial and growing practitioner and policy-driven literature on the relevance of climate change to institutional investment, calling for pension fund trustees to incorporate it into their investment strategy decisions. Trustees are in a unique position, with significant power to affect corporate behaviour through the strategy they implement in their pension funds, as pension funds own the largest proportion of shares in UK listed companies. We therefore investigated trustees’ attitudes towards their role and responsibilities in relation to climate change, to discover whether they are harnessing their power to effect change. This report summarises the views of 20 interviewees, in order to explore some of the emerging themes. The findings suggest a substantial gap between theory (in terms of recommendations from the literature) and trustee practice regarding climate change.

This study is the first to address trustees’ attitudes towards climate change and its potential impact on pension fund investment. Further, it represents a first attempt to gather interview evidence on trustees’ views. The findings of the full study provide rich, in-depth evidence about trustees’ attitudes towards their role and responsibilities regarding climate change.

Interviewees indicated that climate change did not generally feature on the agenda of their trustee meetings and that they considered it to be a relatively unimportant environmental, social and governance (ESG) factor. Trustees interviewed were generally unaware of their fund managers’ activities concerning climate change and displayed a low level of accountability to their members in relation to this subject, rarely engaging with members on their responsible investment policy. Although most of our interviewees said that climate change could be a material issue for their funds, their understanding of how it could affect shareholder value and financial return was partial.

One salient outcome of the research process was that trustees recognised an urgent need to improve their knowledge and understanding of climate change issues and the way in which they can affect pension fund performance. They acknowledged their (unrealised) potential in affecting corporate behaviour through their actions relating to climate change. The interviewees suggested that the interview process itself would incite them to consider climate change in a more active manner. They also made a series of suggestions as to how they intended to change their behaviour accordingly.

We also found evidence of a significant size factor in our interviews, as trustees from the larger funds were more aware of the connection between climate change and financial return, and were generally more knowledgeable about the relevance of ESG issues to pension fund investment.

This study also carries broader implications for pension fund governance and accountability. One of the most significant outcomes of the research was evidence of weakness in accountability chains between trustees and fund managers, trustees and members, and trustees and the sponsor companies. Although we focused specifically on climate change issues, the interviews indicated that the lack of accountability and governance was not limited to the issue of climate change but applied to all areas of socially responsible investment (SRI). Despite the increasingly close focus of the institutional investment community on ESG factors, trustees were not engaging with their fund managers or their pension fund members on their SRI policy. Even the leaders among our sample acknowledged a lack of communication in these areas. There is an evident lack of accountability and governance between the various intermediaries involved in pension fund investment, which contrasts starkly with the highly developed accountability chains between companies and their shareholders/stakeholders through social and environmental reporting (SER).

As a result of these findings we make recommendations on two levels. First, on a theoretical and academic level, we suggest that there is an urgent need for further research into the accountability and governance links between the intermediaries involved in pension fund investment, specifically between trustees and their pension fund members, fund managers and their sponsor companies.

Second, on a practitioner level, there is an urgent need for a code of practice, or at least a set of principles representing best practice in accountability and governance for the pension fund community, in relation to climate change specifically but also emphasising other extra-financial issues. The Myners principles, although representing an important improvement to pension fund governance, did not focus on ESG accountability within the trustee community. Myners illuminated trustees’ lack of expertise across all areas of trusteeship. The broader, ‘soft’, qualitative issues covered by ESG investment require attention by trustees and other members of the pension fund community. In the broader context, if trustees lack expertise in mainstream financial investment, their lack of specific knowledge about climate change risks and opportunities is not surprising. A code of best practice on governance and accountability aimed at trustees would help to resolve this situation. A code of best practice on climate change, produced with government backing as a mainstream policy document for trustees, is suggested as a means of forcing trustees to address the material issues of climate change seriously and urgently.

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