By the time this goes to print (figuratively speaking, for the environmentally-conscious amongst us), trustees will have recently updated their statements of investment principles (SIPs). And with a further wave of changes over the coming 12 months, in response to regulations published only in June, trustees are having to get to grips quickly with new terminology and new thinking in the way they deal with asset managers.

SIPs: more change on the horizon

By 1 October, trustees should already have drafted amendments to their SIPs covering their policies on “financially material considerations” (including environmental, social and corporate governance (ESG) factors, which covers climate change), non-financial matters, and stewardship (engagement with investment issues), as required under legislation introduced in 2018.

Under a second set of regulations made in June this year, before 1 October 2020 trustees will also need to provide additional information in their stewardship policy, and set out policies on their arrangements with asset managers. Trustees will in addition need to make an “implementation report” available to members, detailing how they have acted on the principles set out in the SIP and on their engagement activities (the requirements for which differ between DB and DC schemes).

The new content requirements are coupled with somewhat complicated timings for publication and compliance, which also depend on the dates of the scheme year and the type of arrangement. Trustees should therefore be speaking with their legal advisers as to the timetable they need to follow for their scheme.

An area of high pressure for trustees

Whilst many trustees say they consider ESG to be important to their scheme, the detailed analysis required to comply fully with the legislation has not made it easy for some to meet this October’s deadline. Reviewing investment strategy requires trustees to have a good understanding of investment-related matters, to be able to engage with their advisers; reviewing strategy in the context of ESG, and the questions it requires to be asked of asset managers, necessitates specialist trustee knowledge and confidence in an area which has no simple answers.

In our recent survey1, trustees and scheme managers cited lack of evidence of financial performance of investments and lack of time and resource to be able to consider ESG fully as the main barriers to achieving compliance. And whilst there does appear to be some trustee appetite for ESG, the speed with which trustees are being asked to act risks undermining the underlying purposes of the changes to the regulatory landscape – that is, encouraging longer-term investment focus, transparency and engagement. Survey respondents expressed concerns that ESG risks becoming perceived to be “a tick-box compliance matter”. Indeed, only 13% of respondents said that they had actually made, or intended to make, material changes to their investment policies following their reviews.

In the coming months trustees will need to balance deadline-compliance with making meaningful changes to investment strategy and interactions with managers. For now, trustees should look to create careful business plans, allocating sufficient agenda time to SIP and ESG matters, to ensure they meet the challenges of the next 12 months.

Emily Whitelock

Associate – Sackers

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