The ever-evolving ESG landscape

It's indisputable that environmental, social and governance factors have a material financial impact.

We can see this by looking at the microcosm.

Consider COVID, that came from the environment, had huge social implications and had to be dealt with by changes in governance.

That, in a nutshell, is what pension schemes are facing in terms of ESG factors.

They're constantly evolving.

If you do not take account of them, if you do not work with them, you're going to fall behind, not make the best of the investment opportunities and therefore fail to do the best by your members.

Trustees should absolutely expect ESG to keep evolving.

We've seen over the past five years that increasingly regulation has increased around the way that trustees incorporate ESG into their investment decision making.

We've seen financial markets start to think about how ESG factors impact long term expectations on asset returns.

Given that trustees are long term investors, it's crucial that they think about ESG factors as part of their decision making and ultimately the way that they pay member benefits.

Tick box implies you've done something.

ESG is never done.

It is evolving. You keep on needing to work at it.

The problems we are going to face in 5, 10 years time will be evolutions of the problems we're seeing today or new problems.

Fiduciary approaches do change and they must adapt to the environment and therefore the ESG approaches must also change.

When you look at something as fundamental investment as a strategic asset allocation, working out what assets you're going to invest in, where they are, that needs to take account of all these factors.

Also thinking that you're going to be investing for the long term for your members.

A solid investment process is absolutely key to that.

Firstly, trustees can keep up to date by getting an external input that can either be done through training or through running courses for them with external experts.

Making it part of the regular framework of reporting is also important.

That gives us an opportunity to feedback how we're doing across the year and then undertaking an annual review, I think is also important because the ESG landscape is changing so frequently.

Having that opportunity to step back, consider how we're doing, consider whether we want to make changes to our framework for the coming year.

Systemic risk is the cascading failure in the financial system, which can lead to serious financial and economic loss.

For example, the World Economic Forum has identified climate related risk as one of the top three risks for the last four years running.

Trustees can be good asset owners by ensuring that they've got strong policies on managing systemic risks.

And these policies are shared by the third party investment managers that they work with.

Ultimately, the way that trustees invest can also impact or reduce systemic risk throughout the financial system, and therefore trustees have to think much more widely than just their own portfolio.

They have to think about the impact their assets can have on the wider economy.

I'm Anastasia Guha.

I'm the Global Head of Sustainable Investment at Redington, which is an investment consultant based in London.

ESG factors or environmental, social and governance factors seem to be coming at us from every angle, whether it's climate change or COVID or tech companies facing corruption charges and therefore having to pay fines.

And as a trustee, you want to make sure that your fund managers are taking into account when they're evaluating companies.

We are facing the largest change in the global economy since the Industrial Revolution.

If you're not taking this into account, you are missing a huge opportunity and possibly falling into a huge risk trap.

So trustees need to look at this changing economy today so they can pay pensions for tomorrow.

There's an expectation on behalf of the financial services industry to be managing people's money with ESG factors in mind so that there's a positive outcome, not just in terms of returns, but of societal impact.

And that can only be a good thing.