ESG means different things to different people. For the Trustee, it is about making sure the investments are managed sustainably, for the long-term and that means managing risks and identifying opportunities, including those related to ESG. 

If there are ESG issues that could have a negative effect on the value of the investments, the Trustee expects its investment managers to be mitigating those risks. And if there are opportunities for improving the efficiency of the investments without increasing risk, the investment managers can explore them. 

Managing ESG risk in this way is all about financial value, which is in line with the Trustee’s fiduciary responsibility to manage the Scheme’s assets on behalf of the members. It’s not about ethical values or ethical investing – in other words, it is not about imposing a set of ethical values or beliefs upon a given investment process.

“Net zero” is short for net zero emissions of greenhouse gases, like carbon dioxide, that cause climate change. Net zero emissions is when the amount of greenhouse gases being emitted into the atmosphere matches the amount being removed. So, there are zero emissions in total. 

Many greenhouse gas emissions are created by human activities such as heating homes and travelling, as well as the way society produces and consumes everyday items like clothes, food and technology. So, to reach net zero, the world needs to change the way it produces and consumes. This is going to be challenging, but it is now the goal for many governments and companies across the globe. As well as reducing emissions, the world also needs to actively remove greenhouse gases from the atmosphere. 

In October 2021, the Trustee set out its plans to achieve net zero by 2050 or sooner, in line with the net zero goals of the Paris Agreement. These plans will underpin the Trustee’s approach to managing climate related ESG risks. You can read more about them in the Trustee’s commitment to net zero statement

ESG is important because if an ESG issue is not appropriately managed, it could reduce the value of the investments. Also if new ESG-related investment opportunities are identified, like wind farms, the value of the investments could increase. This matters for hybrid members because the value of the investments directly relates to how much money members will receive in retirement from their DC pension pots, and impacts the Scheme’s security to pay it DB pension commitments

ESG issues can affect any kind of investment. They can be specific to one particular company, such as an inappropriate board structure, or they can be a global concern impacting many countries, industries or companies, such as climate change. They all need managing, as best the investment managers can, to protect the value of the investments.

The Trustee particularly focuses on climate change because it’s a global issue that will affect the whole of the investment world. As such, it’s a systemic risk. 

The Trustee has also prioritised managing climate change risk because science says that the world needs to act now. Current estimates indicate that the world is on course to reach an average global temperature that’s 4 degrees Celsius warmer than its pre-industrial level by the end of the century. This is significantly above the 1.5-degree Celsius target set by the UN as the maximum the world can reasonably tolerate. 

As a result, there needs to be a global transition to a 1.5-degree Celsius world. This transition will threaten some industries and the companies within them. However, it will also open up new opportunities for companies that provide products and services to help achieve these global targets. This transition needs to be managed carefully so it’s as smooth a process as possible for the economy, society and planet. This in turn will help protect the value of the investments. 

The Trustee expects its investment managers to take ESG issues into account when they make decisions about the way the Scheme’s assets are invested. Although the Trustee isn’t directly managing the money, it regularly reviews and challenges what the investment managers are doing to make sure it’s in line with the Trustee’s ESG approach and evolving good practice around ESG issues.

Different investment managers have different approaches when it comes to influencing companies on ESG matters. Some advocate engaging with companies, encouraging them to change their practices so that they can be part of the solution to risks like climate change and benefit from the opportunities it brings. Others prefer to simply exclude certain companies.

The Trustee chooses to work with investment managers who are inclined to engage with the companies they think need to go further on ESG issues rather than automatically excluding them from their investments. For example, when the Trustee was looking to appoint an investment manager for one of its portfolios, a number of investment managers were not selected because their approaches to ESG didn’t meet the standards required by the Trustee.

The Trustee put managing ESG risk on its agenda in 2011 – and has been developing the way it manages ESG risk ever since, particularly around climate change. The Trustee’s commitment to this issue has meant it was one of the earliest adopters of the Task Force on Climate-related Financial Disclosures (TCFD) reporting, and it is a signatory to the United Nations Principles for Responsible Investing (UNPRI). It is also a member of the Institutional Investors Group on Climate Change (IIGCC) and a supporter of Climate Action 100+.

The Trustee also considers the investment opportunities that arise from ESG criteria. For example, in 2018, the Trustee appointed Greencoat Capital to manage a new investment portfolio for the DB section of the Scheme. This portfolio invests in a range of UK-based solar and wind farms, which have generated value for the Scheme while also making a positive impact in the fight against climate change. 

Similarly, for the DC section of the Scheme the Trustee partnered with Legal & General Investment Management in 2015 to develop the Future World Fund. This fund gives greater weight to companies that score well on climate change criteria. This led to the Scheme being the first UK DC pension scheme to include a positive climate risk tilt in a DC default investment fund. And now the Trustee takes climate change and broader ESG risk into account within all its lifecycle funds with the DC section of the Scheme.

The landscape around ESG is evolving all the time, so the Trustee is always looking to make sure it is taking ESG risks and opportunities into account across all the investments within the DB and DC sections of the Scheme.  This includes regularly checking to make sure the Trustee – and its investment managers – are operating in line with good practice. 

The Trustee is continually looking to strengthen its approach to managing ESG risk. It is currently focusing on the way it monitors the Scheme’s investment managers and their policies, processes, activities and outcomes. This includes the way they engage with investments, and the outcome of that engagement. In 2021, the Trustee started to develop ‘dashboards’ that will help it monitor the Scheme’s investment managers, and their ESG and engagement practices even more effectively.