We are therefore pleased to introduce Cardano’s guide to incorporating ESG into journey-planning. Cardano experts have put together a comprehensive overview of everything a trustee needs to know on ESG, covering areas including trustee training, investments and engagement.
ESG cannot get off the ground at a scheme without the proper training of its trustees. Cardano recommends guidance from the Pensions Regulator, and insights from the Institutional Investors Group on Climate Change’s Paris Aligned Investment Initiative.
Looking beyond the simple risk and return profiles of an investment, for seemingly virtuous characteristics, appears inconsistent with trustee’s commitments to maximise returns for their members
There is no right or wrong way to develop ESG beliefs, Cardano Advisory director Lara Rutty writes, however. It is worth considering which ESG factors could have the most impact for members and setting practical goals that can be applied across investments and with sponsoring employers.
Training up trustees and setting your targets is important. But to ensure that schemes meet their regulatory requirements on ESG, it is paramount that trustees build a robust governance framework. Incorporating sustainability risks into covenant assessment is also vital, defined benefit pension schemes being unique stakeholders in companies, Cardano Advisory managing director Michael Bushnell observes.
Perhaps of most concern to many trustees will be the tension between ESG and their fiduciary responsibilities. After all, looking beyond the simple risk and return profiles of an investment, for seemingly virtuous characteristics, appears inconsistent with trustee’s commitments to maximise returns for their members.
Cardano deputy chief investment officer Keith Guthrie, sets out two simultaneous objectives for sustainable investors: maximising financial risk-adjusted returns and having the largest possible positive influence and impact on the real economy. If done properly, these goals can be mutually beneficial, he writes.
Getting this right across asset classes is no simple task. Equities provide the greatest scope for voting and engagement, Cardano senior client manager Magdalena Kennedy writes, while fixed income also offers investors the opportunity to engage, even if they do not carry the voting rights enjoyed by equity investors.
Internal scenario planning is essential to capitalising on opportunities and preparing for risks, Cardano Advisory director Ben Wilmot argues. Task Force on Climate-related Financial Disclosures requirements were expanded in October 2022 to schemes with assets exceeding £1bn. Scenario analysis is therefore compulsory for many schemes, but to be encouraged for many more. This includes the consideration of a sponsoring employer’s entire value chain and the company’s interactions with the wider economy.
Schemes will be more heavily judged, however, on their external actions. Good stewardship matters for pension schemes, Actiam senior responsible investment officer Greta Fearman argues.
If done well, stewardship can have a demonstrable impact on addressing system portfolio risks and helping to drive positive change in the real world. Assessing asset managers on ESG is also vital, Cardano manager Geordie Cox writes, setting out a list of criteria that they will need to satisfy on ESG.
Defined contribution schemes can be overlooked in discussions over sustainability, perhaps owing to their more limited investment universe.
NOW: Pensions head of investment Emma Matthews concludes this guide with an overview on how to integrate sustainability in DC, explaining how to turn beliefs and goals into action.
Download the guide here: Incorporating sustainability into journey planning
