ESG Implementation - challenges and practical solutions

Alex Waite: Good afternoon and welcome to the second part of our joint LCP and Gowling WLG webinar titled ESG Implementation – challenges and practical solutions. My name is Alex Waite, I'm a partner at LCP and I'm going to be chairing this webinar on an issue which seems to be really quickly rising up the agenda both for pension trustees and also for corporate sponsors. I am delighted that we have got practitioners here with us today from both the trustee and the investment perspective, and we've also got advisers from both the legal and consulting world, so we can benefit from a full 360 degree view on ESG matters. I will introduce the panel in just a moment, today we are going to be adopting a Q&A format, based on BBC Question Time and I'm channelling Sir Robin Day including with a spotty bow tie. Don't worry, this is not the new LCP official dress code!

Let me start by explaining the desktop that you'll see in front of you. As well as a video of myself and the other speakers, you should have an image of the slides which currently shows some windmills. That's where we'll be putting up the question as we answer it and also in tune with the Question Time format, I've asked our speakers to keep visual aids to a minimum, but if there is a particularly useful visual aid or graphic, then we'll put it up in that space. Most importantly there is a Q&A box where you can please enter a question for the panel and I will endeavour to keep an eye on that and answer your questions as we go through. There is also a resources panel where you can find links to various related documents on the web. Finally, there's a full bio for each of our speakers and indeed contact details if you want to reach out afterward

But let me make a quick introduction to each of our speakers today. Jason is an experienced pensions lawyer and is head of pensions at Gowling WLG. He also chaired part one of this webinar series when we introduced a lot of the jargon behind ESG. We are not going to be explaining that again today, but if you do want to gain a better understanding of any of the terminology that we use, then I recommend that you catch up with part one of the webinar which is still available on the LCP website. Naomi is an independent trustee and managing director at 2020 Trustees. She has a lot of experience in this area and we are looking forward to hearing her answers. David is head of responsible investment at USS, one of the largest pension schemes in the UK and one that has taken definitive action in this area, so it should be fascinating to hear his insights. Ian is a partner in LCP in our investment team and one of our experts in ESG matters. So a warm welcome to all of our panel today. Thank you for answering our questions.

Let's move on to those questions. In part one of this webinar, we had a number of people ask us through the portal about how to deal with strong views expressed by pension scheme members and we have also seen a recent campaign by Richard Curtis called Make My Money Matter and that, I think, will further motivate members to talk about how their pension money is being invested. As this is something of a minefield for trustees, our first question is on screen now. Do you think that trustees should do more to engage with scheme members on ESG related matters and how should trustees go about that engagement process? Jason, I think this is a legal issue to start off with, so perhaps you can kick us off?

Jason Coates: Great, thanks Alex and good afternoon everyone. Yeah, you're right, absolutely, increasingly members do have views on climate change and other ESG issues and how their own pension funds are being invested is absolutely true. I would strongly encourage trustees to use all the tools at their disposal to engage with members and there are two reasons for doing this I think. Firstly, to engage members on what you as trustees are doing in terms of integrating ESG risks as a financial factor into your investment decision-making, so members are informed and they can comment if they have views on what you're doing and how you're doing it. Secondly, if you want to consider any non-financial factors, such as ethical or moral reasons.

So I think the question for the lawyer really is, well OK, trustees want to be engaging, but how do they do that safely and effectively, given the current position under the law? What I would just like to bring up is a graphic as I will take us through the next piece. So if we take a step back a moment and just consider the key legal principles which apply here, the headline to that is that trustees must consider financial factors, and so to absolutely comply with legal duties must see ESG climate change responsible investment considered in that financial context, integrated into the overall assessment of financial risk and reward. On the other hand, the law, as I said that trustees may but they don't have to take into account with non-financial practice, so for example an ethical view about say tobacco, coal, gambling, and according to guidance from the various bodies, trustees can only take those non-financial factors into account when the two tests are met. Firstly, that trustees can evidence that the ethical view is supported by the membership, and secondly can demonstrate that there is no significant risk of financial detriment posed by the investment.

So when you just think about that, how do you actually go about seeing if your membership supports a particular ethical view on gambling to make that test and what does supported mean? Is it a view agreed by 100%25 of the members, well probably not 100%25 but what's acceptable evidence of support, is it over 50%25? If you ran a survey, could you follow the majority who responded, but what if you got some really strong dissenters to that majority? Should you look at a vote by number of people or do you look at their benefit size. So there you can see the difficulties that you just need to grapple with and as a result I think that trustees need to look at this member engaging question probably slightly differently for DB to DC.

So for DB scheme trustees, I'd say that because of what I've just described, particularly because member views are often being couched in terms of those ethical, non-financial factors, it can be quite challenging to give material weight to member views and decision making. It could get trustees into difficult territory. Now there is a longish exception, of course Alex, which is there are schemes that are connected to particular organisations whose own reason for being might be linked to that ethical, moral or religious issue and a charity for environmental protection on climate change might be an example, where you might easily be able to say look the views of the members of this scheme can reasonably be seen as preferred to being aligned with that of the organisation. But in general terms, for DB schemes, I think the better approach is engagement about what actions you're taking in terms of integrating ESG risks as a financial factor. So in other words the best route for engagement in the DB world is to focus on meaningful and engaging disclosure of your approach to ESG matters to the membership and the wider world. And encourage feedback and comments on that disclosure. And we know from the first webinar we had that the disclosure around all of this and in particular climate change is increasing all the time. So this offers trustees with DB benefits the real opportunity of engagement through that disclosure and also, in terms of finding an appropriate balance between that engagement, but also not exposing the trustees to an unnecessary element of risk. Now members may well have views as to how, and how well you as trustees are integrating those ESG risks into your financial assessment and, at the very least, your members ought to be well informed about what you're doing. Now, of course, some trustees of DB schemes might want to engage a bit more practically and that's fine, for example with a survey. So all I'd just say is that they should take care about how they position that in terms of making it clear as to what the policing duties of the trustees are under current law and then it give a consultation where the trustees won't necessarily follow exactly what the members have said.

For DC schemes, on the other hand, all of what I've said for DB I think applies, particularly in terms of the fiduciary duties, which you can see in much the same way I think. You know ESG should be integrated into that from a financial perspective under those basic principles. And, as well as through their disclosure requirements I've just described and I think for me for DC trustees to engage more for assessing value for money opens up a natural channel. But, of course, there's also scope for being more ambitious in member engaging for DC, particularly in terms of gauging views and enabling the trustees to offer self-select options which meet the wishes of the members. So to wrap up Alex, firstly the members are absolutely increasingly interested in these ESG issues and they do have more they want to say on them, and absolutely trustees should engage with members on those issues. But, as I say, they just need to do that thoughtfully and carefully under the current normal and probably slightly differently for DB and DC.

Alex: Makes sense. Thank you, Jason, you're making surveys and other ways of engaging. I mean I'll ask our audience in a moment what they think is appropriate. Before I do that, Naomi this must be something you have seen in practice if you could answer that?

Naomi L'Estrange: I agree very much with Jason that asking questions of the members can be quite difficult and I was quite glad when the Government pulled away from making that compulsory, because my experience of engaging with members is you tend to get a fairly low response in general, whatever you ask, and the responses are often quite extreme. So on ESG related topics, you'd probably get a number that were passionate for it but you're bound to get somebody who thought you shouldn't do it at all, and so I think that is quite difficult. But, as Jason says, particularly with younger members and for DC there's a huge opportunity around engagement and I'm just going to put up a slide here, if I can make that work. It doesn't look like it's working. Anyway, it was in relation to some survey results, oh there it is, that have been carried out recently and you'll see of those five results there, the two at the bottom are the most interesting in this context. So the survey indicated that 50%25 of the members who responded would contribute more to their DC pot if they knew that the money was being used well for responsible investment and indeed 30%25 would invest in climate-friendly funds even if this meant lower financial returns, high costs or greater risks than traditional funds. I think that's really important information. But again, as we've talked about, I think the answer is less about asking specific questions to your membership, but more to communicate what you're actually doing and try and show that where you have taken action. For example, to reduce the carbon impact of your funds that might well make your younger members much more interested in it than they otherwise would be.

Alex: Yeah, no I think that's fascinating. The audience no doubt have their own views on this, so I would like to move now to a polling question and the question is, which options do you think that trustees should use to engage with scheme members on ESG related matters? The options should be in front of you now and you can click as many of these as you like, so it's multiple, you can have multiple responses. All member surveys, all member forums getting together – probably online these days, representatives member forums – so just looking at a sub-group, communicating trustee actions – along the lines of what Naomi was just saying perhaps via a newsletter or an online report, or other – and if other I'd be really grateful if you could use that question box to let us know what other you're thinking. When you've selected as many of those as you'd like to select press the submit button and we will gather those results in here. Naomi, I think you were volunteering to do the countdown music, was that right? No, you weren't volunteering to do the countdown music. Fine.

In that case, we will just run that, can't actually see the results coming in at the moment, but we will move to the results slide and see what responses we've got. Here we go. So coming out top is what Naomi said, so that's really good at 91%25 communicating what actions have been made. Kind of joint second all member surveys – more than 50%25 of people suggesting that which I think is really interesting. Some would see it happening, but not 50%25 of people doing that yet. Representative forums again seeing that happening but I wouldn't say 50%25 of schemes are doing it. All member forums, not surprisingly, quite low. One or two people have put in that they have got other, so if you could let us know what other you would recommend that would be really, really interesting.

Let's move on to our next question because a number of trustees have come under pressure to divest from certain investments like fossil fuels. Others, as Jason has already mentioned, if they are charities in a particular area believe they should exclude certain sectors, and perhaps tobacco, gambling, or controversial weapons. Now I know this is an area that has presented legal and practical challenges for trustees, so the question I would like to ask our panel is, when should trustees exclude certain investments, and what are the practical challenges with doing so? Jason I think we need to kick off on the legal side again, please.

Jason: OK. Thanks, Alex. I think it probably is helpful to give just a bit of legal context before David talks about how the USS has gone about this sort of thing, but hopefully, the audience will just see how David's example will illustrate perfectly some of these points.

So the three points, I think, by way of introduction are (1) focus on financial factors. That goes back to what I was saying in answer to the first question. Secondly to think carefully about definitions and thirdly to review periodically. So just briefly on each of those three. Point one, so under the current law as I've said the key points remain that you fundamentally need to make these decisions based on financial factors and not non-financial factors. That takes us then back to drawing on evidence and financial impact analysis on which to base those decisions. You need to remember of course that the ESG are factor-influencing financial risks and reward should be considered alongside all the other factors, so this is not just looking at one thing in isolation but looking at things as a whole. But it has been suggested by many people now that some of the traditional financial roles used by markets as a whole may not have taken some of these specific risks, for example, climate change, into account in a way that they need to. So point one reflects on the financial factors.

The second point, if you're going to go for exclusions and screens, you do need to take care, I think, over definitions of those screens. Inevitably there are grey areas and there's granular detail, so you know what should you exclude? Is it producers, users? What about suppliers that enable production? What about companies who have multiple business lines and you set a threshold of turnover for what's in and out of the screen? I think these are difficult issues and you need to be as clear as you can if you seek to use exclusions and screens.

And then the third and final point there Alex is keeping things under review. So as for any sort of trustee decision-making and discretion, it is important that you keep the exclusion on the screen under review, probably annually, because the overall risk and reward equation for an investment will change, you know the factors around ESG might change, the ESG just might change. So really important for trustees to keep things under review.

Alex: Thank you. As you say, this is something of particular relevance to the USS so I'm going to skip quickly over to David.

David Russell: Thanks, Alex and good afternoon everyone. Just to start, I need to reiterate the point that all I'm going to discuss going forward is based on the financial analysis of some of these issues. The USS has for many years been asked by certain groups of our members to divest from a range of different companies based on ethical or non-financial issues. In fact, we have our own NGO called Essex Fuel for USS which has been around since the mid-1990s and still ask us to divest from a range of companies and sectors which they don't think that they should have their pension fund invested in. So only this year did the USS make an announcement that we would be divesting from a small number of sectors based on some analysis that we did internally. What we started by doing was identifying some sectors where we didn't think the market was taking into account long-term themes, like climate change, that could affect the value of our investments. The sectors we identified were thermal coal, certain types of weapons, landmines, cluster bombs, white phosphorus based weapons, and leaf tobacco manufacturers. Three different sectors where we thought that analysts and fund managers were simply not building in longer-term risks into their analysis.

So what we did is we formed internal teams to undertake that financial analysis and, as an example, I was in the group that analysed our coal investments or the long-term implications for the coal sector. But also in that team were analysts from our emerging markets equities team, our fixed income team, people from our private markets team, so a broad input into that analysis. Three reports were produced, one for each sector, and they were then reviewed by our legal team to make sure that we were in line with the legal points that Jason has just made that the decision has to be made on financial grounds, not on ethical or non-financial grounds. And to reiterate, because these were investment decisions and an investment analysis, that was undertaken by USS investment management, the funds manager, wholly owned by USS the pension fund. So the decisions were made by the fund manager and then reported to our trustee, USS limited and the board, and then the decision was taken we would divest from these three sectors and then you have to go into implementation mode.

How do we do this? What we did, we did a review of external service providers, there are a number out there. We chose two who could give us the spread of data that we required to look at these three sectors and the detail here is very important. How do you delineate between companies in the same sector? So for coal we chose thermal coal. Coal can be metallurgical coal as well, that's using steel, but we're not divesting from that. For thermal coal we're divesting on the grounds of if they make 25%25 or more of their revenue from thermal coal because there are large mining companies out there that have a small proportion of coal in their business which we don't think is material to their long-term performance. We gave ourselves two years to deliver this because it is complicated to get some of these companies out of our holdings, both internal and external, because we then have to come up with agreements with our external managers on how we're going to apply our divestment policies by our external holdings.

And as has been pointed out, we will be undertaking annual reviews of the analysis that fed into these investment decisions because as Jason pointed out, there could be changes in the issues, changes in the financial performance of those companies that make it that the analysis doesn't apply anymore.

A final point is that whatever you do, sometimes your members will not be pleased with what you're doing. As an example, in the last few weeks, we've been approached by our member group telling us that one of the companies, an American bank that we invest in, is supporting thermal coal, therefore we should be divesting from them as well. So there are always more things that your members will be expecting from you. Thanks.

Alex: Yeah, if you follow on to its natural conclusion then you invest in nothing because everything is related to coal or oil in some way I think. Maybe I've misunderstood. We've got some questions coming in and would really appreciate it if our audience members could send in a few more questions as well and we'll pick them up in the second half.

But I'm going to move swiftly on to talk more about climate change. Obviously, in recent years we've seen huge climate events and highlighted the need to tackle climate change has been a lot of society pressure from high profile campaigns such as Greta Thunberg, David Attenborough, Extinction Rebellion, etc. And, of course, Government policy has followed suit, Theresa May promised that we would be net zero by 2050 and that is now enshrined in legislation. And, of course, from a pensions perspective, we've got the DWP Consultation on managing climate risk as well. So our next, our third of five questions is, what of a practical challenges schemes face in seeking to reduce their carbon impact of their portfolios and how are you going about addressing those? Naomi, can I pass that one to you first?

Naomi: Absolutely. I'd say the largest challenge up to now has actually been the lack of interest from trustees. I think there's been a bit of a disconnect between the campaigning in the world and the approach of trustees and I think that is for a number of reasons, a fear of stepping outside the herd, you know questions over the evidence base. A big issue is confusion with ethical thinking that climate change issues are an ethical issue when, actually as we've mentioned several times, this really is about the financial impact.

But assuming for the purposes of this that your trustee board has got over that, what practical challenges come in there? Well I think I've seen quite a bit of hesitation on the part of consultants up to now and most of them have tended to come to trustee boards with more of a tick box approach to the ESG and climate change. They're pretty responsive if you ask the questions but the trustees need to start by asking those questions than showing genuine interest. I am delighted to say that things are moving particularly with investment consultants and, in particular, there is now a new working group on climate change with 12 major investment consultants involved which includes LCP. I think that will see some change but it still, in my experience a minority for consultants who are really engaging in this. So if yours isn't, ask them because they will then respond.

The second aspect is that evidence base, which I think has been quite a big barrier up to now and how could we be certain from a financial perspective that it wasn't going to have a detrimental impact, particularly as the charges do tend to be slightly higher on these funds. Ian dug out for me a really interesting slide, which I'm going to attempt to show you. The baseline is a standard global equity index and then the other lines are a series of different climate change impact Paris Accord-type impact funds, and you will see over the last few years, but particularly this year, those funds really moving away from the standard global indices. I think that's great evidence for us all. As well as that, as Ian talked about in part one, there are a lot more options in terms of funds and they can do a lot of, you can approach this in a lot of different ways. There is a fund to suit what your particular scheme appetite is.

You might find that your sponsor or your co-trustees are still not keen on taking action. If that's the issue I would suggest flipping the debate around. Looking at this chart, the evidence is clear now that reducing carbon in portfolios should provide at least the same results, with no financial risk and in that context, how can you afford not to take action to take a bit of carbon out? I would certainly think that the industry up to now has been moving far too slowly relative to the targets that we've got and in contrast to that, we have an opportunity to make a real difference. I do think that we've got a duty to our members and indeed to their children and grandchildren to help the planet get to the place where it needs to be for us all.

But for me, it is about continuous improvement rather than perfection. We can get concerned about knowing all the answers, I always think it's about asking the questions instead. One way which we're seeking to do that within 2020 is by asking questions of all our investment consultants and challenges for all our portfolios about levels of carbon. The way we are looking at that is less about absolute levels, but more about setting challenges for continuous improvement each year. We've written to fund managers asking those questions to say, you know, what have you done in relation to carbon this year and we're going to ask you next year as well.

Now at the moment, you get 300 page responses to that which isn't necessarily helpful, but here as in the rest of the world, what gets measured gets done and I think we can have a real impact if we just keep prodding everybody and asking questions and taking those kind of reducing steps.

Alex: What gets measured gets done, that's a key takeaway – I totally concur with that one. Ian a few challenges there for investment consultants, you should pick that up.

Ian Gamon: Yes, thank you Alex and thanks Naomi. Quite right to challenge the investment consultants as we heard from Jason earlier. Managing climate risk part and parcel of trustee's fiduciary duties, so you are investment consultants, myself included, we should be all over this. So whether it is a longer term physical risks from global warming or those more immediate transition risks the sort of things we saw with BP writing down their balance sheet by £17.5 billion earlier this year. Those risks, those transition risks from moving to a low carbon economy, there's a lot for trustees to be doing and thinking about here with their investment consultants of course.

So, sort of going to the question for me the key hurdle on climate risk probably like Naomi is to move this up the agenda of Trustees so the way I would suggest a good start point to you all is to just start with what is your risk, let's understand it and here are some practical actions I think you can take to get you on a good footing there.

So the first is carbon foot printing you can get information on the carbon intensity of your portfolio, similarly fossil fuel exposure, helping to reveal the risk of stranded assets there. Another approach which I have used with Trustees and very much like is the transition pathway initiative study which identified the highest emitting companies around the globe. The one extent your investment manager has invested in those and to what extent those companies are aligned with the goals of the Paris climate agreement, that gives you a good picture quite quickly as to just how your portfolio is shaping up with that transition risk in mind.

The other practical stat which we will see more of through what the DWP consultation is proposing is scenario analysis. LCP has developed that already for clients and so you should be able to see that from your investment consultants as well. What that means is looking at how your scheme's investments could be impacted by a scenario like an orderly transition to the maximum global warming target as the Paris climate agreement also trying to get below two degrees or less. What impact would that have, that quite rapid transition from where we are now on your investment portfolio and similarly what happens if governments don't take action and we are on target for a four degrees warming in the next 50,000 years? That is big physical risks, how does that impact your portfolio and your funding level in DB. So some suggestions, some practical suggestions on getting that risk analysis to engage the Trustees start to work out what your risk management process is going to be and then from there what actions might you take with your investments. Do you need to take action to address that risk? Perhaps more engagement and monitoring of your managers regularly.

So the final point I would just finish on is as Naomi mentioned already the products out there for pooled plans particularly because I know that is a particular issue for most Trustees have been evolving rapidly. There are some very good products starting to come to the market now which engender that alignment with Paris goals. So I think this is an area to move upon.

Alex: Thank you, Ian. So we have had a few really interesting questions come in so I am going to pause to look at some of those right now. So one, I will put them up on the screen in front of you. Any advice if members wish to invest positively. For example, they want to invest in black owned businesses? This is probably a legal one. Jason do you want to pick that one up?

Jason: Yes, thanks, Alex that's a good question and I guess my answer is that for some of the comments I made earlier and obviously I am pretty sure of the context of what the current law says and in current law for a question like that you have to focus if you are looking at direct investments on whether there is the financial grounds to do so that takes you back to the analysis. There is an analysis to help you support that or secondly considering whether to look at this as a non-financial ethical factor and then I go back to you have to meet the two tests I described earlier and not detrimental of financial impact. If it is more indirect investment through your managers there are issues which you can raise with your managers asking them such questions.

Alex: Brilliant, thank you. We have had a few questions in on DWP, TPR those kinds of things. Let's push this one up to the screen. What do the panel make of the DWP's latest proposals for initially larger schemes to set metrics and targets to carry out climate relates scenario analysis. Are they confident that schemes, asset managers, investment consultants are ready for that and compliant? I think David this is probably one for you initially but happy to have other people chipping in.

David: Sure, the short answer is I am not particularly confident that most pension funds and most asset managers are ready for this. What I find particularly odd is that pension funds are being asked to do this and asset managers currently aren't. So it would be mandatory for large pension funds above £1 billion staggered in terms of when they have to do this but not for fund managers and to be honest most pension funds will be getting the data from their fund managers and from the underlying companies who it isn't currently mandatory to do this. So while I think it is a good idea I think pension funds need to be reporting on how they are addressing climate change risks and reporting in line with the TCFD which is what this is, the task force and climate related financial disclosures which is what this DWP consultation is basically pushing for. I think it is coming our way and we have to recognise that. I do think that DWP need to think about and other regulators need to think about how the rest of the chain can support pension funds in actually delivering this.

Alex: Understood.

Jason: I would just add to that, I think there are clear challenges but some of them are easier to overcome than others so in listed equities which can be a large parts of most DB schemes and investments it is relatively easy to come up with the carbon emissions and metrics that the DWP are proposing and similarly fixed income. It is where you get into the private assets and sovereign bonds that these things are a lot more challenging so it is nice to see that the DWP in their consultation does recognise some of those challenges and there is this as far as able clause available. So I think we are expecting over the next certainly four years greater pressure on the managers to come up with that data and make things easier. Investment consultants like LCP are already on top of a lot of these things in terms of helping to measure metrics and it's just getting the data at the source that is as David says a real challenge.

Alex: Understood thank you. So we do have a few other questions that have come in but I think for now I will just move on to my fourth of five questions and will come back to more questions later particularly because stewardship by Trustees is often questioned how should Trustees be voting, engaging with the whole and also should they be buying investments we have already talked about. So the question is what practical steps can Trustees take to exercise those ownership rights? David over to you first, please.

David: Thank you, Alex. I will start off by saying the USS is slightly odd in this context as in USS the pension fund has an in house responsible investment team and in house fund manager so we do this stewardship. We do the engagement, we do the voting for the Trustee directly. Most pension funds are not like that most pension funds will be an external employee asset managers to do that for them but the asset management and stewardship and voting so I am going to focus my conversation, my response on that side. USS itself does have external managers both in public and in private markets so we have developed processes for both appointing them in terms of due diligence and how they address ESG but more importantly in terms of monitoring what they do once they have got our money. They are all very good at selling us a good product and less good at telling us exactly how they are delivering on the ESG side. Just to be clear our statement investment intervals does highlight that our ESG policy applies to all our assets so of course that must include our external assets as well.

So what do we do, we have a detailed process for monitoring our managers, some of which is available online publicly if people want to have a look at that. What we do is we expect our managers to be able to explain with their Steward activities with their engagement activities with the underlying assets that they hold what the aims of that engagement are. What they expect the outcomes to be and what the actual outcomes of that engagement are. People are very good at talking about processes, we have engaged with 500 companies, we have sent 200 letters what has the change of engagement and those letters actually led to. Otherwise, it is not particularly productive.

We also expect managers to collaborate with other managers or other asset owners. That is a far more effective way of generating change within companies. So as an example USS is part of an engagement of something called the climate action 100 plus where we and a small number of other pension funds and other asset managers have been engaging directly with Shell about its position on climate change. Its alignment with the Paris agreements and the outcome of that engagement was earlier this year the company agreed to be net zero by 2050 with some caveats but well along the way to achieving that rap target. Sorry, it is committed and has an ambition to achieve that outcome by 2050.

You should also expect your managers to respond to them to what you want them to report not necessarily give you, the report that they want to give you but will often have a set of presentations that they come to a meeting with and they will run through that very glossy set of figures and pictures rather than focusing on what you might think are more material issues and so it is important the Trustee or their consultants ask specific questions that they want answered rather than relying on the managers themselves to dictate what they want to tell you. What we have found in our monitoring and our questioning of managers is that they will often give us generic information that bears no relation to the actual fund or mandate that we have given them so we have had generic voting and stewardship data for a public equity fund for a debt portfolio. So you have to make sure they are not just giving you the waffle they want to give you and they are responding to what you need to know for your assets.

On voting we expect managers to be more transparent than they currently are. USS are able to publish its voting data online so in a searchable database that our members and other interested parties can see. It baffles us that large fund managers cannot do that as well and there should be an expectation that they do that. We have a manager who provides us with their voting data in a PDF which is unsearchable and has many pages of data that you have to trawl through to find the information that you might be interested in. It has got to be better than that going forward.

They should also be able to tell you how they voted on specific resolutions at companies because they are using your vote at those AGMs and they should be able to describe why they have taken decisions to get there. As an example going back to the Shell engagement again because we have been engaged very heavily with Shell on their position around compliance alignment with the Paris agreement, there was a shareholder resolution at Shell for the company this year which requested them to be aligned with the Paris agreement. We voted against that much to the annoyance of a group of our members but because we were in a detailed engagement with the company we felt it was better for, we thought they were better aligned with the Paris agreement than the member group did and we explained that. We expect our fund managers to be able to explain their voting position from similar issues as well.

I think it is worth noting that almost all the conversation we have been having now has been around public equities. We do not just invest in public equities, we have to as pension funds, expect stewardship across all our asset classes so that includes fixed income, that includes our private equity portfolio, that includes our direct holdings so you should have that expectation of your managers whatever the asset class is to be able to tell you how they are managing their stewardship, their oversight of the underlying assets in the portfolio.

One final thing there is a new steward code that was released last year and funds can start reporting to by the end of March next year. Our expectation is most fund managers should be signing up to that or at least delivering what the requirements of the stewardship are. That will be a strong question in our goal monitoring, are you signatories to the stewardship code. Thanks.

Alex: Yes thank you. Ian, can I get some thoughts from you?

Ian: Yes I am going to keep it brief because I can see we have a lot of interesting questions coming in from the audience so I am going to just say a couple of things on this. The first is that just today we have had the PLSA put out the much needed template on collecting voting data from your managers so it is on their worksite go and grab that. That will address a lot of those concerns that David was talking about, making sure you are picking up data or your manager is sending you data that is relevant to the funds you are investing in and demonstrating where they are voting on significant votes. So that is really helpful.

The other point I just wanted to leave you with is a proactive step that I have seen used and I think is very effective for getting into what your managers are doing and that is on a quarterly basis, make it six monthly if that is how often you meet. Write to your managers and ask them how they are responding on certain topical issues in voting and engagement to see how they are actually responding on the group. So that might be gender pay gap reporting is one of the questions we alluded to earlier, you know the proportion of black members on the board. More diversity more generally, climate change issues. Just by raising those questions with your managers on a regular basis you start to get an understanding of how they are dealing with these things and you know get comfortable or not that the managers are doing what they should be.

Alex: Thank you. Yes as you say we have got a lot of really interesting questions coming in. Let's do a couple of those now. So first of all I think this again is probably a legal question. Do panellists know of any schemes that have been taken to Court by members as a result of not properly considering any ESG issues? I will start off with Jason but others shout if they are aware of something.

Jason: Yes thank Alex so in the gender I guess specifically just yet. We have seen and are seeing some Court cases that go around the topic so in the local government context there has been some cases this year and increasingly I think we will get members raising issues as to whether or not they end up in Court we will see but you can see that it might only be a matter of time given the way in which the legislation is tightening and disclosure requirements mean greater transparency. The other thing I would just say Alex is what we are seeing more of though is sort of collective membership, letters in to Trustees and organisations like Clienter putting Trustees and pension schemes under pressure in terms of what they are doing. So whether it's into Court necessarily maybe not just yet it might come but we are certainly seeing an increased pressure from the outside world.

David: Just add to that one Australian super is currently going through the Courts where a member has taken their Trustee to task over failure to address climate change risks in the portfolio, so that is still going through and bearing in mind that their legal circumstances is a fairly similar infrastructure albeit all DC but infrastructure is quite similar to ours so that is being looked at as kind of test case in Australia.

Alex: Yes very much more of that one David. Thanks for raising that one it is very important. Actually, while we are with you David I think this question might be for you as well. Within what we might call the SE circles discussions have started about the impact on culprit culture, short termism at board level and indeed requested pay. Is that the kind of engagement that you are having with the Shell's?

David: Yes so as in engaging with company on executive pay is high on our list of particularly voting activities so we were going to vote on exec remuneration every year and every three years there is a vote on the strategy. We have quite a robust view that executive pay should be linked to performance and it isn't always necessarily the case that is why we have quite a strong voting policy that pushes back on that. Our voting data is actually made available in our annual report and as I said we have a database that people can search on them so short termism is an ongoing issue both in terms of corporate and investment sector in general there is the pressure on fund managers and pension funds for returns and if markets are going against us there is pressure for the decisions to change and I think that is something that should be avoided. We should be taking long term investment decisions. Corporate should be taking long term investment decisions and perhaps riding out some of the short term pain that sometimes companies have to go through.

Alex: Absolutely particularly at the current time. Thank you. Some of the other questions that have come in I think are actually answered by my fifth and final question so I am going to push that one out there which is around about jargon really and how do we cut through that and the question is, how do you differentiate between what is really good ESG and what is simply greenwashing? Ian, can you kick us off with that?

Ian: Yes thanks, Alex. As we have heard industry is rife with jargon and three letter acronyms like ESG so it is easy for the managers to sound impressive but yes fall short of code ESG practice and yes equally consultants can be accused of the same.

So in part one of the webinar, I talked about the characteristics we look for in a manager we see as genuinely integrating ESG so I am not going to repeat that here, instead, I am going to keep this short and practical or you.

I want to start with some hard data on what your manager is doing. So let me just put up our ESG dashboard and illustrate what I mean by this. This shows on one page, the key metrics for a fund that you might be invested in, an example fund here is the developed equity fund and how that would compare to the wider benchmark the FTSE developed index. So looking across the top line you can see it gives scores for the three pillars under environmental, social governance and, overall. These are scores out of ten with the highest score being better.

So here is the practical bit, let's say for example you have got this type of dashboard for your fund. It has a very low score for on governance relative to the wider benchmark, automatic question, why is that? Can your manager explain why and what they are doing to improve this? It could be they have for example a big investment in a company that is lacking independent representation on the board or the gender balance is not good either so is your manager engaging to address that point and that is where having the hard facts allows you to differentiate between the managers that are genuine on ESG and those that are just greenwashers.

You will see in the middle of that dashboard I focussed in on climate metrics, as we have heard, are really topical right now with the recent industry guidance for Trustees on climate change and the DWPs proposed regulations for large schemes. Once again having that data reported to you and having to manage and monitor and challenge your manager on climate related risk. Worth being aware that ESG data like this is by no means perfect the data provided at the end of the day they are relying on information that has been made available to them from the companies. So a good example of that came to light when I met a fund manager who challenged, and I challenged them on the high carbon intensity for their global equity fund.

The fund manager, in that case, knew exactly why the figure was high. His fund was invested in a steel producer not reporting its carbon intensity. So without that data, the ESG data provider assumed that this company like other steel producers burns a lot of carbon but what that data provider did not know is because the company was not reporting it is that the company is using recycled steel as lower energy processes than the average steel producer. So not only was the manager able to demonstrate some good understanding of the management and risk around it but they also uncovered some hidden value that other investors might not see and had the opportunity to help them engage with and help the company on its reporting. So you know a very instructive, great example of having some questions and good questions based on data for the manager and having insight and understanding of what they are doing.

You will see on the chart other parts help bring out concerns around controversies, for example, breaches of the UN global compact principals, and again you know all these things can just help generate good questions and understanding of what managers are doing.

So I know David and Naomi are keen to respond on this too so, to sum up my recommendation, arm yourself with data, challenge your manager to help you get an understanding of what it is they are doing to integrate ESG in practice. I'll leave it there.

Alex: Yes indeed thank you. David.

David: It is quite difficult, managers are very good at communicating. As I said before there they like plotting reports and it is their job to sell stuff to pension funds and if they are good at it and they are rewarded for it. They are very good at marketing but it doesn't mean their ESG is always up to scratch. As an example, even this week's professional pensions had a report out that one of the consultants had done some research and discovered that about three quarters of asset managers consider climate related risk and opportunities in their investment processes. However, nearly 40%25 were unable to provide any examples of how they actually did that.

So they say one thing and actually are not delivering on the other side. So that gets back to the point I made earlier you need good monitoring of what your managers are actually doing. Good interrogation of the examples that you want to be drilling down into not necessarily the stories that they want to tell you and a particular focus on the outcomes of what happened rather than the processes that fund managers have been through. So pension funds should be expecting their consultant's support in delivery this.

Alex: Yes, final word to Naomi.

Naomi: Yes I will just share with you a couple of questions that I have in my back pocket. One for asking fund managers and one for asking investment consultants. So for the fund manager, I would like to ask whether the responsible investment team is able to veto the selection of particular veto stocks for ESG reasons because that gives you a really good sense of whether their responsible investment team is actually properly integrated. Then for the consultants, it is a bit of a cheeky challenge, I ask whether they would sell greater fund for ESG reasons, and if not why not?

Alex: Good questions to ask certainly. In the vain of asking questions in our final couple of minutes, I am actually going to cheekily ask a final question of our audience because I am just looking forward as to how can we take action on ESG matters and what is preventing people from taking on these actions, these ESG matters and so I will put a list of options in front of you. Again you can select as many as are appropriate and please do so now. Lack of Trustee knowledge, perhaps training consultants that are of variable quality shall we say, lack of suitable investment funds, perhaps there are simply higher priorities on the Trustee agenda right now, COVID, company covenant perhaps being one or maybe nothing stopping you that would be fantastic to hear. Select whichever of those apply and then press the submit button and then I am going to try and take one more question as well so I won't give too long for a response. Let's see what we have got. Great thank you. A mixed bag is the answer so there are a lot of different challenges in front of us but definitely, a need for more Trustee knowledge and training and you know that is something that we are very much trying to help Trustee boards with. Partly through webinars like this but partly through tailored training courses that we provide to individual Trustee boards. Other things on the agenda presumably things like COVID makes sense as well. Good to see 40%25 saying no issues we are cracking on with it, fantastic to see.

I think one final question if I may to our panel which is this one here. ESG scores are all very good but how do we create intentional positive social outcomes beyond what would have happened anyway? I am going to actually zip all the way through our panel and ask either answer that question in one line or give me one other action that can make sure we get proper positive action. Naomi, could you give us one action?

Naomi: I think to be bold and be brave, ask and do it.

Alex: Thank you, Ian.

Ian: Stewardship critical to make change, drive change so retaining some ownership even if it is small for those companies that have controversial matters so that you can drive change within it.

Alex: Jason.

Jason: Yes I think pressure, collective pressure on managers and probably looking for some support on registered and regulatory change and particularly to the managers.

Alex: And David.

David: Expect more of your consultants in how they support you in your stewardship and your oversight of managers.

Alex: Thank you, I know we are about to lose you so I will just wrap up by saying this is something that is going to run and run obviously. I have found this particularly interesting as part of my development of thinking about what can be done and what cannot be done perhaps for practical and legal constraints. To the audience, thank you very much for your engagement, great questions all the way through, really enjoyed the session you made my job easy. For the polling questions, there were another ten questions we didn't get to so we will endeavour to get back to you individually and I am sure we would all like to say a big thank you to our presenters for their insights today. One way of doing that is to respond on the feedback questionnaire that you will see as soon as we stop this presentation so we would really appreciate your feedback.

With that, I would just say thank you and good afternoon.