Starting your ESG journey: an introduction to the requirements and issues

Jason Coates: Good morning and welcome to the first of the two part series for webinars on the topic of ESG, jointly hosted by Gowling WLG and LCP. My name is Jason Coates and I am head of the pensions team at Gowling WLG and a very warm welcome.

So today we are focussing on helping trustee boards start your ESG journey and in September our second webinar will be looking at best acts of implementation of ESG. What does good really look like? Today we will be demystifying ESG for you, we will be making ESG simple and accessible as you set out on your journey to integrate ESG into your central investment decision making in line with, as you will see later, involving legislative requirements and best practice.

I am delighted to introduce to you a great panel of speakers this morning. Mary Verity, a lawyer in the Gowling WLG pensions team and a member of the ESG working group. Rachel Brougham, a professional trustee with BESTrustees and Ian Gamon, a partner in LCP's investment team who specialises in ESG and related issues.

So they will each be doing a presentation to cover the legal perspective, the consultant's perspective and the trustee perspective.

Now on the screen you should see the slides which are currently showing pictures of our presenters and there should also be a small video of each of the four of us and indeed a window into our homes. So, let me just kick off by introducing you to the features of the platform that you have in front of you. You have a list of the presenters where you can access our bios and send us an email afterwards if you would like. There is a resource list where you can see our latest thinking on a number of issues and another box for direct access to our websites. But most importantly please have a look and find the Q&A box where you can enter questions for our speakers this morning and I will be keeping an eye on that as we go through and passing your questions, either as we go through the session or in a Q&A session at the end after our speakers finish.

At the bottom of the screen you can switch off all the fancy features and just focus on the slides if you want to. There is also a CPD certificate if that is useful to you.

OK, so before we kick off with our speakers we have a few audience participation polls to do and we are going to move to the first poll. It should be on your screen now. So, which one of these statements best describes an investment strategy with ESG imbedded into it? So is it one that applies environmental, social and governance factors as part of the assessment of investments to determine their future financial quorums? Would you say it is one that seeks to consider both financial returns, social or environmental good to bring about positive social change or thirdly, the one in which you apply your values -; social, moral or religious -; to your portfolio. Or all of the above or none of the above?

So, if you can select your one answer and press submit now and on this screen we will now see how the answers start to come in. I am starting to feel a little bit like Terry Wogan at the Eurovision Contest, the excitement is now unbearable as I watch the results come in. An interesting question and the reason I asked this was in particular just to see what people thought of different definitions. Markings can be made I think for all different answers here, in fact I can see quite a few people are taking that view. We will just give people a little more time for the final answers. I think I would have probably gone for answer one myself.

So interestingly we have a small group going for answer one, one of you on answer two but actually half of you going for all of the above. So, thank you very much for that.

So that gave us an introduction as to what we all think ESG is and we are going to kick off now with Mary from the legal perspective. Mary, over to you.

Mary Verity: Thanks Jason and hello everyone. As Jason has mentioned I am going to be talking about ESG from a legal perspective and I am going to convert three main areas.

So, firstly your duties when exercising your power of investment. Secondly, the recent legal changes on ESG in relation to SIP content and the new implementation statement and finally some of the changes coming further down the line.

So you should be able to see Spiderman on your screen at the moment. You might be happy to know that this is not for a complicated web analogy. It is about the tag line, where there is great power there is great responsibility and I think it is really similar to the language that lawyers use in this area because we routinely talk about trustee powers and duties. But the idea of responsibility perhaps brings into play the wider context in this area and I think is one that we will keep coming back to. For now, however, my message is simple. As trustees you have a fiduciary duty to exercise your investment power in members best interests and what is clearer now more than every before is that these best interests are best served by taking into account ESG considerations because this has a direct financial impact on financial outcomes. So there is a lot going on. There is stuff coming at you from all angles and we will look at the legal and regulatory pressure in a moment. But I think the member external pressure is really the bit that is driving change most quickly and of course pension schemes do not operate in a vacuum. The wider context has been highlighted really recently in the press by Richard Curtis. He is the founder of Comic Relief and a film producer and he has launched a campaign a couple of weeks ago called Make My Money Matter. He is calling on the UK pensions industry to move its £3 trillion of assets under management into more sustainable investments. He is calling on you to take action, and you can see why. You as trustees of pension schemes have a lot of assets under management. You are major institutional investors and collectively you have great power.

So, against that backdrop, just moving on to think about your obligations. When exercising your power of investment which is a fiduciary power because you are exercising it on behalf of others, you are investing other people's money, you need to think about quite a few things and starting to peel back the layers at the very centre is your scheme rules. Now, you are likely to have a broad power to invest as if you are beneficial owner but you do need to check.

Next there are some really well established principles in the case law that you need to be aware of and I think these can be distilled down into three main points. Firstly you need to exercise your power for its proper purpose and, of course, normally for a pension scheme that is to make sure you can deliver pensions for your members in their old age. Secondly, you need to do that prudently. You are not operating in a vacuum so you need to adjust your returns to take account of risk and thirdly, you need to take into consideration all the relevant factors and disregard irrelevant ones. I would expect that sounds pretty familiar to you. At this point I feel compelled to mention Cowan and Scargill which is the 1985 case about the mine worker's pension fund. But only really to say that the case is often misquoted and para phrased and as result it is misunderstood. It is completely consistent of those principles.

So, moving on to think about the legislation which is perhaps a bigger culprit of any confusion in this area. But actually you do not really need to worry about that because following a couple of law commission reviews the regulations have been amended a couple of times, for the second time last year. So it is now really clear that your policies in relation to financially material considerations need to be included in your SIP and that financially material considerations can include ESG considerations. I think there are a couple of key things to note here.

Firstly, the investment regulations do not tell you that you have to act on financial considerations such as ESG. The decision about what to invest in and why is still yours but, as we will see in a moment, you will have to disclose your policies lining ESG publicly and it might get quite uncomfortable to do this if the data supports they are financial factors and your policy is not to take action based on that.

So, this brings me neatly onto the really big change. There is data available to back up that greener companies are outperforming their peers. That socially responsible companies is what the public wants. A few years ago it might not have been as easy to prove that these sorts of investments did lead to better or comparable financial outcomes but happily the world had moved on. It follows that if trustees are properly to discharge their fiduciary duties because these ESG considerations are financial factors they should form a part of trustees investment decision making and not something separate or outside it.

So, a quick look at the other recent changes in the legislation and regulation in this area. As I have already mentioned, you now need to include in your SIP your policies on financially material considerations and from the same date in October last year you need to include your policy on stewardship. From 1 October this year you need to include your policies relating to asset managers. Ian is going to cover what those requirements mean from a practical perspective so I will not spend any longer looking at those. The other big change is around disclosure and letting your members and the wider world what you have been doing in this area. If you are a DC or hybrid scheme then from October last year you will have needed to put your SIP on a freely accessible public website and DB schemes have got to do the same from 1 October this year.

Next, not only do you need to publish your SIP content online but you will also need to start producing and publishing an implementation statement which is a statement setting out how you have been complying with the policies in your SIP and I am afraid this is where it starts to get a little bit tricky. This is because there is a disconnect in the legislation between the requirement to actually produce an implementation statement and the requirement to put it online and this relates to the fact that the implementation statement sits inside the annual report and accounts and, as I am sure you know, the annual report and accounts only has to be produced within seven months of the end of your scheme accounting year. But both obligations, so the obligation to produce and put online actually kick in from 1 October this year, or start to, and it is the timeline between the two. So the timeline for the annual reporting accounts is causing some problems, especially for schemes who would normally sign off their accounts shortly after 1 October deadline. So, for example, a scheme which had a year end of 31 March and this disconnect has been the subject of a lot of debate in the area. Of course, in due course the requirements are going to work as they were intended, with the publication of the implementation statement following on after the publication of the annual report and accounts. But as a fix, or there could be a fix, we are seeing schemes that might be affected signing their annual report and accounts before 1 October deadline, so a little bit early, and this allows them to take advantage of the transitional provisions which do contain a clear longstop of 1 October 2021 for putting the publication of the implementation statement online. If you think you might be affected by this you should probably have a chat with your lawyers.

Anyway, in practical terms, it means the implementation statement timetable is roughly the same for DB and DC or Hybridge schemes. One point of difference to note is that the list of the items that need to be included in the implementation statement for DB schemes is shorter. It only needs to cover policies on stewardship and voting behaviour, whereas the DC and hybrid schemes the SIP board will need to cover, the statement rather will need to have a SIP to be employed more generally and any changes that have been made to it.

So these new disclosure reports and requirements are facilitating the growing member and external pressure that I mentioned at the start. So just to pick on a couple of legislative changes which are expected soon, you can see on the slide there.

Firstly, we are expecting a consultation from TPR at some point this year about the new single code of practice which will implement some of the governance obligations brought in by IOP2. This is expected to explicitly cover consideration of ESG factors within assessment of own risk by trustees.

Secondly, the pension schemes bill, which I am sure you will have heard, has recently been amended to specifically include some sections on climate change. These include a requirement for climate risk reporting in line with recommendations of the industry led task force on climate related financial disclosures or TCFD. Whilst the provisions for the pension schemes bill are only expected to cover larger schemes, the TCFD recommendations themselves are voluntarily and cover schemes of all sizes. So I think the idea is that schemes are being encouraged, all schemes, to move towards standardised climate risk reporting. It is also worth being aware that an industry group has been set up and is currently consulting on guidance with scheme trustees to support them in adopting the TCFD recommendations and that DWP and TPR have been closely involved in that. The final guidance is expected to be available later this year.

I think that these changes evidence that ESG is no longer considered as something wholly permitted to investment decision making.

So, to conclude I would say that whatever type of scheme you are changes are coming your way and these are being largely driven by member and external pressure and this is supported by the legislation and also the financial data. On that note I would like to leave you with a press quote from the launch of the Make My Money Matter campaign that I mentioned earlier. Our members are powerful and we must use that power for the best of our world.

With that I am going to hand back over to Jason who I think is going to take us through another poll.

Jason: Thank you Mary and I think it is clear from what Mary has just said that the background initiative of that context continues to change and evolve and is something that you as trustees will need to keep watching.

So, before we move on to Ian to give us the consultant perspective, Ian was keen that we got your comments on this question before he started to speak.

So, poll two is this one. What is holding you back on your ESG journey? Select each answer that is relevant to the pension scheme you represent and for this question you can choose more than one answer. So the options are: lack of knowledge and awareness in the trustee board; not enough time set aside in the trustee agenda; not convinced it will enhance risk adjusted returns; adviser is not experienced or credible on ESG matters; or lack of suitable investment funds.

So, as I say, on this one you can choose more than one answer. Please select your answers and press submit. So, as I mentioned Ian was keen that he could see what it was that you thought was getting in the way before he talked through some of the solutions and options that consultants can help you with and, of course, as we can see here it may be a combination of things that make that difficult.

So watching the answers come through this is also reminding me of playing a football manager computer game many years ago when I had set up my team to play the big match and then watched for 30 seconds as the match played out automatically until I got a result. We are starting to get the results coming through, I am going to give people a bit more time to consider their options. Quite a split here actually there are some votes coming in for all the different answers. Interestingly, so we are almost up at 50%25 for the lack of knowledge and awareness on the trustee board. There are quite high scores for the not enough time and not convinced answers and a few less a bit behind on the advisers not being experienced or credible and lack of suitable investment funds. But interesting that there are people in the audience who are right across this range picking up these various things which are potentially hindering you taking things forwards.

So I think we have got most of our answers in from you. Thank you for that. So just looking at that as we see, going down in order that they were listed we can see the lack of knowledge being right at the 46%25 and then closely followed by the time, not enough time and not convinced it will actually enhance risk adjusted returns which is perhaps the most interesting answer, Ian, in some ways as I pass over to you.

Ian Gamon: Yes, thank you Jason and thank you for the results on that poll. I think it's really helpful to see and the top one lack of knowledge. So I am hopefully going to tackle that right up in the next ten minutes with three steps that are going to help you as trustees and advisers get ahead on your ESG journey and make sure that you are well placed to stay on top of those issues in what is a fast moving area.

Starting with step one and this is really about making sure your trustee board has a right governance in place and typically that means starting with training to ensure you have got the sufficient knowledge on ESG and stewardship more generally to make informed decisions, playing straight into that higher score on the poll where you feel you lack knowledge.

So, good news, you have made a good start by joining this webinar so well done, thank you. Beyond this obviously as a trustee you have many other sources of potential help. There is the published guide which are pictured on the screen, lots of sources for that, but also you will be looking to your investment advisers and investment managers and, again, pleasing to see from the poll results that you felt that in general most of your investment advisers were trained and knowledge on those areas so that is good to hear.

Perhaps less obvious than those, many of you may have an employer scheme sponsor with specialists in the business who can bring some helpful knowledge on your trustee board on these issues so do not forget to involve and think about those.

So next up is making sure you have a clear understanding of your roles and how you are going to delegate responsibilities on ESG. For example, larger trustee boards among you may look to delegate to a sub-committee or perhaps even a sustainability specialist if you have got someone with that particular knowledge in your group to chair and lean on that. Those of you with smaller trustee boards probably want to maintain it across the whole board but you will also be more reliant on your advisers.

Turning to policies and beliefs. As we have already heard from Mary, you should have from October 2019 a set of policies on ESG factors and voting and engagement in your SIPs already so I would challenge you to just ask yourselves are they fit for purpose? In particular, we know that the regulator is going to be scrutinising these more, particularly as they become published and we have heard from, for example, the UK Sustainable Investment and Finance Association who reviewed DC scheme SIPs earlier this year that they felt most policies out there were vague and trustees did not commit to concrete actions so I think this is going to continue to be an area of focus for the regulators and industry.

So, what do you do? A good way to be on the front foot, run a trustee workshop or survey to discuss and develop a consensus on your investment policies and beliefs and in a minute Rachel is going to be talking through how she did that with one of her trustee boards to give you some insights on how that works.

The final part of good governance is monitoring. So recognising this is not a one off task but that ESG needs to be integrated into your business on an ongoing basis.

So two quick actions for you there. Make sure you include it in your regular business plan and make sure ESG factors are included in your risk register.

Turning to step two. So you have set your policies the question next is, are your investments being managed consistently with those policies? For me this starts with assessing your managers capabilities and on the screen you will see I have highlighted four areas that we as LCP use to assess this. So under commitment, checking to see that the managers are genuinely committed to integrating ESG into their investment process. Examples of that being are they signatories to the UN's principles for responsible investment, the UK stewardship code, looking at to see there is not greenwashing of their investment process.

Under people things like the senior management team. Are they accountable on ESG matters? Is ESG include in training and development of their teams? Do they have a specialist RI team that the portfolio managers can turn to for extra help?

On investment process, the third on that list, you are looking to see that they integrate ESG throughout and ultimately does ESG effect the buy and the sell decisions in the portfolios that they are managing.

Finally, on stewardship, let's see good evidence that they are using voting and engagement to improve investment performance; that they are forming their own view on voting decisions; they have got robust policies in place on things like fair pay, order and diversity, climate related risk; and not only the policies but they are acting on those and that there is evidence of collaboration with others to support that.

So for you as trustees challenge your managers on those points when you meet them and also expect your advisers to be providing this RI due diligence. On the screen you will also see I have pictured some findings from our regular survey investment managers RI practices and that is just one example of the way we help trustees in this area.

So, just turning to the next slide. I find this really useful. It is a great way to get trustees engaged on ESG for their particular investments and that is looking at what I call a dashboard of ESG metrics. I have illustrated here an example for a global equity fund and that shows, as you can see across the top, key ESG metrics for this fund including the environmental social and governance scores taken from MSCI and with that various climate related metrics.

In the interests of time I'll just pick out one from the centre of that picture which illustrates the greenhouse gas emissions associated with the investments of that fund. Here you can see with the numbers, if you can read them, they are quite small, the blue bar showing 105 versus the wider broader index of 159 indicating a significant reduction in the greenhouse gas emissions for the investments in this fund. Apart from anything else, it just generate a conversation with the trustees. You can start to unpick what is behind these investments, what is driving these numbers and lead on to some really good conversations with the manager about what they are doing, how they are thinking about them. As Mary mentioned there is new climate risk guidance coming down the line so this is a good way of getting on top of those sorts of things.

Going on to my final slide then, step three. So you have established your policies and beliefs and assessed your managers and your investments against those policies. Are they fit for purpose? So is there anything you could or should do better and, if so what sorts of things can you do. So as presented on screen there is a wide range of options available to marry up what are your investment objectives and beliefs on responsible investment with suitable funds and this chart just illustrates that range.

So it starts on the left with your traditional investment fund, sole motivation being financial gain and I put a standard index tracking fund within this and I am sure many of you will have significant allocations to funds of that type. So within that there is no explicit account of ESG factors and I would argue that they are not going to deliver the best financial returns over the long term. In deed there is evidence increasingly that you get better financial performance from integrating the ESG and earlier this year, for example, Morning Start reported nearly 5,000 funds that they analysed. The majority of the ESG funds beat their traditional peers over periods of one to ten years.

So with that in mind moving to the right on the chart are funds which introduce some elements to mitigate ESG risks and that could be through the managers only due diligence on stocks, it could be through the ESG metrics that we saw on that previous slide to screen out certain types of stocks or tilt away from the lower scoring stocks on that ESG metric. The point for you is that there is a good range of options both within active and passive investment approaches to achieve the enhancements you are looking for and at competitive fees. The investment industry is falling over itself to launch new funds and compete with each other on this.

Moving further to the right on that same chart, you are introducing more specialised options for trustees, particularly seeking to capture opportunities. So you have sustainable funds and what they are trying to do is invest in assets which can be expected to win as we move towards the lower carbon economy, or perhaps you make greater use of efficient materials, stronger social aspects.

Finally, impact funds, the last slide on that chart. They are in common with sustainable funds but also looking to deliver measureable positive financial, environmental or social benefits and I notice there was a question on this raised which we will perhaps come back to later.

The take away is that there are lots of options available and for you as trustees you can access what you are looking for. Particularly, I would say, for trustees of DB pension schemes make sure you consider this for your corporate bonds. It is not just about the equity portfolios.

So to wrap up on step three. Check your managers and investments are aligned with your objectives and beliefs on ESG and, if not, make sure you review those and consider whether there are better alternatives available to what you are holding.

With that I will hand over to Rachel who is going to provide a trustee's perspective on implementing these things.

Rachel Brougham: Thanks Ian and good morning everybody.

I found when I first came to ESG as a trustee it felt like quite a nebulous topic and it was difficult for me to really envisage how we might accommodate it in a practical way, especially when a lot of the assets that we hold on the boards that I sit on, they are called assets and very often index and market cap index funds. So it was a slow start I think before I really got my head around it. Before I talk through a bit more about what we did on the various trustee boards I have worked with, I thought it was worth taking a step back and reminding ourselves of the overriding obligation of trustees.

In my view, it is about making sure that we have enough money to pay the right benefits at the right time, and investing our assets, we need to do that in the best interests of members and beneficiaries which Mary touched on earlier. But that point about investing in the best interests of members cannot be done at all costs. As May said earlier, as owners of trillions of pounds worth of assets we do have a significant amount of power and we should exercise that power responsibly in the broadest sense of the word and, therefore, take a balanced view of risk and return. In doing that we can then start to understand that taking ESG factors into account can actually be aligned to members best interests.

So the lightbulb moment for me was really about understanding that environmental, social and governance factors can all be pretty much expressed as financial risks. Be that not being prepared to transition into a low carbon economy, whether that is having standard assets or where poor governance practices will impact the success of the company. There is more evidence now that taking into account ESG factors does not in fact detract from returns and in many cases can enhance them and Ian referenced that towards the end of his presentation there. Some fund managers have been able to demonstrate that their ESG versions, for want of a better expression, of established funds have faired as well if not better than the original versions of those funds.

So how do trustee boards move forward on this subject? For me, on the various boards that I sit on, training has been essential and we saw in the poll earlier that actually a perception of lack of knowledge on trustee boards is what is holding them back. So training, of course, is essential. You need to understand the link between ESG and financial risks and you need to understand your regulatory obligations. They are coming thick and fast at the moment as we heard from Mary earlier.

Given how much is coming down the line and the expectation that the regulatory pressure is only going one way, then training is not a one and done exercise and you will need to come back to it periodically as this whole area develops over time.

Ian touched on developing trustee board beliefs earlier as well. It is a really useful exercise to go through, certainly on two of my boards that I sit on we had that exercise and it challenges you a little bit to think a bit more broadly as to your commitment in this area. So you can determine what is your commitment here? Do you simply want to keep out of jail and do the minimum that you need to or do you want to be a little bit more proactive, or a lot more proactive? You can then determine where you focus that commitment if you want that to be ESG more holistically or climate related specifically. We heard from Mary that the pensions bill has been amended to make specific reference to climate change in. Of course, as with any other investment belief discussion the active passive discussion is not far away and it is equally as appropriate in this area. There are organisations that present themselves either as active solutions or index solutions.

Again, setting beliefs as a board will not be a one and done exercise. I think it should be revisited periodically for a couple of reasons really. Your own confidence in this area will grow and develop over time and therefore it is worth coming back and checking in that what you wanted to achieve at the outset is still appropriate and, of course, the shape of the landscape will continue to shift and there we are.

So those beliefs that you develop together with a good understanding of your obligations and the nature of the subject will then help you determine the strategy you want to take forward. Do not forget of course that any change in investment strategy will require consultation with the employer and it will be interesting to hear the employers views on this from an investment perspective compared to their own corporate activities on ESG. Certainly one of the schemes that I work on the employer was certainly in the camp of we do not want this to impact returns in a negative way by pursuing an ESG type strategy. But as an organisation they take their environmental responsibility incredibly seriously. So, that could be interesting conversations for different trustee boards around the place.

On a governance note, trustee governance rather, each of the boards that I have worked on we have dealt with this at a board level, full board level as opposed to sub-committee. Now that is just the way we have chosen to work and I do not think there is necessarily one particular right answer to it and you have to determine what the right approach is for your own trustee board in that regard.

So, moving on to putting this in action then. Even if you are a board that simply wants to stay out of jail there is a lot that you can and should be doing. At the very least you should understand each investment managers responsible investment activity. Ian referenced that earlier on. That includes their engagement programme and their voting strategy record and you need to consider whether they align with your expectations. Now even if a lot of trustee boards will remain invested in market cap index funds, those managers can and should be wielding their influence through engagement and voting. I saw a question earlier about investment manager research into the quality. There is an argument for exclusion undoubtedly, but actually there is an argument for influencing from inside and therefore there is a bit role for index managers to play in this area. It surprises me actually the variation in approach of index managers. There are some very, very good managers out there that have extensive engagement problems and vote all of their shares, for example, and other managers out there for whom those activities are actually really rather light. As their client we can push them on this and really demand better in that regard and we should use our influence as best we can in that area.

The other thing you can do, and again Ian referred to this earlier, is to seek independent assessment of your investment managers approach to ESG. LCP do their periodic research and other advisers will do the same too. I think that is just a useful check in to see what the independent knowledge view of those managers is which will help understand where your own manager sits within those different areas.

In terms of your own board governance. Again, going back to my points about training and assessing your beliefs. This thing is not going to go away and I think it needs to be very clearly managed through your risk register and your business plan and make sure you do come back to it periodically.

Lastly, even if your ESG expectations remain at a fairly low level and a keep out of jail camp, then you can factor whatever those expectation are when you come to appoint a new manager for whatever reason you are doing in the course of your business. Of course, do not forget your disclosure obligations.

Of course, some boards will want to do a lot more from the off and some boards over time will arrive at a place where they want to do more. So this is where you can start to be a lot more proactive in your approach. You can actively decide to remove managers if they do not meet your expectations. We have talked about the difference in approach of index managers. You can start to pursue strategies with specific ESG focus whether you do that across the three elements broadly or whether you go down the climate change element specifically. Again you want to do that using active management or index management. There are lots of index funds being developed now that have, for example, climate tilt or other ESG tilts that you can look at.

The response in the industry to this continual ramping up of regulatory demands is evolving rapidly and the universe of solutions is large and growing and actually potentially confusing. One manager's ESG fund will be quite different to another's. Managers use different means of scoring ESG. You need to understand that comparing one manager's score with another is not necessarily comparing like for like. So you will need your investment advisers to guide you through that to find the solution that best sits within the strategy that you want to pursue.

Of course we should stay alert to the evolving landscape. I have mentioned it a few times and we need to monitor ESG and the place to do that is through your normal quarterly investment performance reporting in any event and making use of the dashboard that Ian referred to earlier.

Finally, and not insignificantly, we need to be prepared for member engagement on this topic. We heard from Mary earlier about the launch of Make My Money Matter with significant celebrity endorsement. I think that that kind of campaign is going to herald a shift in member interest, particularly in DC schemes where members are actively making their own or hopefully actively making their own choice about where to invest their money. So the question for trustee boards then is how proactive do you want to be about member engagement? Do you want to go out there and engage with them directly or, at the very least, be prepared for more member questions in this area.

With that I shall hand back to Jason and look forward to taking any questions later. Thank you.

Jason: Great, thank you Rachel and many thanks to our three speakers Mary, Rachel and Ian. You have all clearly given our audience lots to think about now and everyone will need to be deciding what to focus on as a next step.

On that point, before we take some of the questions and thank you for all of the questions that come in, we have quite a few. We have just time for one final poll just to see what you all think you will be doing next.

So the question is up on the slide now. Which one of these is the key immediate priority for your trustee board in relation to ESG. So is it holding a training session for ESG for the full board; could it be asking your advisers to help you define your ESG project timetable; engaging with your investment managers to understand better their various ESG strategies, their implementation and reporting; all of the above or none of the above.

So we are back this time to just one answers so if you can select your answers and press submit.

OK so it will be interesting to see which one of these you decide to go for. One of the things that we found in practice that often it is just the getting going on the journey that is the hardest part, that once trustee boards do have a plan and start work on this area boards make really good progress quite quickly and if anything gets in the way of that, as was shown by the answers to an earlier poll, it is things which are external to the board as opposed to the board's own position. Of course, as we have heard from all our speakers this context of this ESG issue is something that is continually evolving and so is a case of moving forward. I do not know if anyone is going to reach their destination on it yet. It is a journey and it is a question of taking that journey forward.

I am just going to give people a little longer to answer the question as we just look through how the answers are coming in we can see that the highest answer so far looks like being the engagement with the managers to understand better their strategies and all of the above.

Actually, as I said, we have had quite a lot of questions now, Ian, and some of those have been about managers and I shall ask the panel in a moment a bit about how they feel the managers are doing responding to the challenge themselves.

We have also had some interesting questions about what difference pension schemes can make either because perhaps their schemes are not consolidated enough to make a difference or, indeed, another question which just challenges about how much pension schemes can make a difference being a proportion of investors, so we shall come on to some of those in a moment.

Just finalising where we have got to on the poll. There we go. So we have got a few people who are going to, just under 20%25 hold a training session, 20%25 getting their advisers to plan the journey, a larger proportion perhaps a little further down the journey already getting involvement from investment managers and quite a few of you thinking actually your speakers have prompted you into doing all of the above. So, thank you very much for those answers.

So clearly from all of that you are all going to be very busy. We have time now for some questions for the panel so I am going to start, please, by asking Ian first of all in relation to that question about the managers, and in particular, how well, Ian, do you think the managers are doing in helping trustees. Someone mentioned some recent cases of companies that got into trouble and wondering actually whether the ESG procedures that those managers have in place would have kept them divested from those troubled companies?

Ian: Yes, sure thank you and this particularly plays to the outcome of that last poll where most of you were now wanting to now, on the back of this, engage with your managers and find out more.

So in answer to the question. There is a real diversity of what you see among the investment managers from what you will see on the passive managers and by their nature having to rely on things like MSCI's metrics rather than talking and engaging with the companies that they invest with directly. Through to the active managers where if you have got a very concentrated portfolio of, say, 40 stocks those mangers I have seen and speak to are having regular conversations with the company management, so they really get under the skin. Some of them do not focus on the ESG issues and they are the ones we have concerns with and they will score poorly when we rate them. Others are very good at unpicking and even going to a thematic approach. So they will take a topic like cyber security for a year and they will challenge all of their target companies on those issues to find out what they are doing.

So things like you mentioned Boohoo, very topical for its concerns over poor labour treatment of the people in Leicester and Wirecard where they have obviously had the fraud scandal. I am pleased to say many of the managers that we recommend are not invested in that unless they are passive but critical that those investment managers are challenged on how they tackle things like labour standards within the companies they are investing in, for Boohoo for example, and on the governance side relating to Wirecard -; are they looking up independent board governance insights from them. So ultimately it is about making sure you challenge your managers. Find out how they are tackling those sorts of issues. Are they getting access to the company's management team?

Jason: Thanks Ian, and Rachel may be just turning to you from the trustee perspective in terms of the help you are getting from managers. What is your experience so far and what do you think trustees should be pushing for?

Rachel: Certainly from my point of view where we are going with this is each time we get a manager in for their normal periodic come in and chat and tell us about how you are getting on kind of thing, we do specifically ask them to talk about their responsible investment activities. Some are better at doing that than others. One I specifically recall, I will not necessarily name names, but they gave a good story but actually the transparency was not there. What helps us as trustees is to understand some of the stories behind the engagement. So here is a particular company that we have had engagement with, these are the issues that we talked to them about, and this is the outcome of that conversation. That to me is what helps trustees get their heads around this stuff a little bit better. It is all very well saying we talked to 58 different investee companies over the last quarter and we have voted on 30%25 of the shares. That is all well and good but actually hearing the story is more helpful. So we are starting to push the managers that we talk to, to tell us those stories and help our understanding of how this really does start to make a difference.

Jason: Thank you Rachel.

Just taking a slightly different tack we have had a few questions come in around the difference of approach between DB and DC. Mary perhaps I can ask you if there is anything particularly you think ought to be pulled out in terms of the distinction in relation to this or not?

Mary: Thanks Jason. Yes, sure happy to take that question.

I think fundamentally the obligations on DB and DC scheme trustees are exactly the same, certainly from a legal perspective. So it is acting in members best interests and it is about the financial piece. So these considerations are financial factors. I can see a couple of points of difference. So there is a part of the legislation that talks about an appropriate time horizon. Potentially for a DB scheme that could look quite different to a DC scheme that is perhaps going to be around for a lot longer, or is a different demographic and a DB scheme that has a longer time horizon I suppose. Then the other thing that is a point of difference is that for a DC scheme you usually have a default fund and then members will be able to be a bit more active and make selections on choices on where to invest and so perhaps that could be an area where you could bring in an even broader flexibility in relation to things that are ESG and beyond.

Jason: Great, thank you Mary.

Just picking up on where you went with that around perhaps in the DC world the member piece being slightly stronger potentially. Perhaps I could just come back to Ian just to talk a little bit about member consultation. We have had a few questions about what that looks like. What do you do? How much notice do you give it and does that matter between DB and DC?

Ian: Thank you that's a difficult question actually and one I know that the legal advice can differ quite significantly. Because if you are going to apply what is called a non-financial factor or a screen for ethical reasons, trustees need to reach that view on the basis that there is a shared member view on that and that can be quite difficult to form because if you do a poll of everyone in your scheme what happens when 40%25 say yes and 60%25 say no. What is the shared member view or vice versa the other way around? You are faced then with a bit of dilemma as trustees as to how you respond to that and my general guidance, and any trustee will need to take this on its own merits, would be to look first for financial justification for doing these things because a legal route is much more straightforward unless open to challenge.

I think that there are exceptions and I do have clients where we would do this, particularly those in the charity sector. So if you have a charity in a medical trust then it is quite obvious usually that certain schemes, like tobacco being the classic, would be a shared member view because all the people working for you and past workers would generally hold that view. I think in some areas its clearer cut. Where you are having to go to members on a survey basis it is fraught with difficulties and I would say tread carefully and see how you go.

Jason: And Rachel do you have any comments in terms of member engagement so far?

Rachel: Yes certainly on DC schemes we have gone out and surveyed members and asked questions along the lines of what is important to you. But also would you be prepared to pay a little bit more in terms of costs and charges to get these outcomes relating to ESG particularly around climate. We tend to see that younger members are definitely more engaged with these topics, more so than older members. So that is interesting of itself. So we have done member surveys, it is then starting to bring that back and work out what that looks like. Certainly in DC it is possibly a bit easier because you can have your default which clearly a lot of the money goes into but you can make more available to members through the self select range which then allows you to address more ethical points which was the last point there. So it is possibly easier to accommodate member views in DC than it perhaps is in DB.

Jason: Great, thank you. Thanks Rachel.

I am just conscious of time. We have just a few more minutes before the hour is up and we have some fantastic questions in. I am just going to try to squeeze in two more.

Ian, if I could just come back to you. We have had a few questions on the topic of ESG in the context of portfolios that are fixed income deals and also linked to that you had to bring ESG on choice of government bonds. I just thought I'd get a couple of thoughts on that.

Ian: Yes, sure. So where you have got fixed income which a lot of maturing DB schemes would have, then I would typically expect you to have some corporate bonds in there and there is no reason why you should not be doing your ESG due diligence in exactly the same way as we talked about for those.

Where it is government bonds then ESG still applies but probably less so on the UK government but definitely more so on if you got emerging market bonds in there or other sovereign debt where you want to understand what are the labour standards, what are the protections, what is the governance in those jurisdictions. Within probably the more traditional gilts and, of course, using swaps and total return swaps on gilts, you might want to think about counterparties and their ESG practices. So that is an area that if you have got a lot of gilt, pure gilt exposure, and use of derivatives you might look at counterparties but that I think is an evolving area and the managers will be pleased to hear from you and working out what their responses are.

Jason: So one final question to each of the speakers just to give me a short answer to but it is an important question because a couple of the audience have posed questions which just perhaps challenge how much difference pension schemes can actually make. Either because they get a small percentage of the investor group or because the lack of consolidation means small schemes cannot make a difference so, Mary, perhaps starting with you. Can pension schemes make a difference?

Mary: Yes, if you are all super heroes. Absolutely, I mean the company as well. I think there are some celebrities who would agree and the growing external and member pressure here is just one area that is not insignificant so yes absolutely I think so.

Jason: Rachel?

Rachel: I do and I think if we took the view we have only got a small level of influence and if every institutional investor whatever they are doing took that view then nobody would make a difference. So I think we can and should make a difference. Also if members start to see this through their pensions they might then think about their other investments that they may have and start to think a little bit more carefully about how they are invested in terms of ESG as well.

Jason: And Ian?

Ian: I think Rachel put it very well there and the only other point I would make there is a rising tide around the globe of this type of encouragement regulatory movement and public demand and direction in that area, Greta Thunberg being the classic person that you will have in mind. So it makes a big difference and if we are all pushing in the same direction then it will involve change and make change.

Jason: Thank you again to all of our speakers. Thank to all of you in the audience for being with us, you are clearly all going to be very busy. We are all going to be very busy as this continues to evolve.

So that concludes our first webinar on ESG. We hope that you now all feel confident to play a part in developing your trustee board's thinking on it whether as part of your overall strategy in the DB scheme or within the default of a DC scheme and that you will join us in September as we explore the best practice implementation. Particularly come back to that issue of engaging with managers.

Thank you for all your questions and we tried to cover as many of them as we could. Unfortunately we did not have time to cover all of them but we will take a look at all of them after the webinar and we will endeavour to come to each of you with a follow up.

Finally, your feedback on today's webinar is really important to us. It is really easy to give it. When the webinar finishes you will get a prompt automatically so please just fill in the feedback to the webinar then.

Thanks again for joining us and hope to see you in September.