Just Pensions 2005 Responsible Investment (RI) Trustee Toolkit <ul><li>The toolkit aims to help UK pension scheme trustees...
Introduction to RI <ul><li>What is Responsible Investment (RI)?  </li></ul><ul><li>RI combines investors’ financial object...
RI Approaches - 1 <ul><li>Engagement a.k.a. “shareholder activism”  </li></ul><ul><li>Engagement refers to the processes t...
RI Approaches - 2 <ul><li>Positive Selection a.k.a. “positive screening”  </li></ul><ul><li>Positive selection is a proces...
Regulation & Guidance - 1 <ul><li>SRI Pensions Disclosure Regulation (2000) </li></ul><ul><li>The amendment to the 1995 Pe...
Regulation & Guidance - 2 <ul><li>Myners Review of Institutional Investment & the ISC </li></ul><ul><li>Statement of Princ...
Regulation & Guidance - 3 <ul><li>HM Treasury's Review of Progress on the </li></ul><ul><li>Myners Principles (2004) </li>...
Regulation & Guidance - 4 <ul><li>Pensions Regulator’s Trustee Knowledge & Understanding Scope Guidance (2005) </li></ul><...
The Case for RI - 1  <ul><li>The Shareholder Value Case for RI </li></ul><ul><li>Many SEE/CG risks/opportunities are inves...
The Case for RI - 2  <ul><li>The Regulatory & Legislative Case for RI </li></ul><ul><li>The UK government clearly recognis...
The Case for RI - 3  <ul><li>The Legal Case for RI </li></ul><ul><li>Trustees can legally take account of SEE/CG issues in...
First Steps - 1 <ul><li>Section 4 of the toolkit provides best practice first steps for </li></ul><ul><li>four different t...
First Steps - 2 <ul><li>DC schemes with members who have diverse values: </li></ul><ul><li>Trustees should ensure that the...
First Steps - 3 <ul><li>DB schemes with members who have diverse values:   </li></ul><ul><li>For passively managed mandate...
First Steps - 4 <ul><li>DC schemes with members who have similar values: </li></ul><ul><li>Trustees should offer a range o...
First Steps - 5 <ul><li>DB schemes with members who have similar values: </li></ul><ul><li>Trustees should consider adding...
Potential Next Steps <ul><li>After pension schemes have implemented the </li></ul><ul><li>appropriate best practice first ...
‘ How to Do It’ Guides to RI - 1 <ul><li>Getting Started  </li></ul><ul><li>Provides some basic tips for trustees on how t...
‘ How to Do It’ Guides to RI - 2 <ul><li>SIPs </li></ul><ul><li>Meet requirements of the amendment to the 1995 </li></ul><...
‘ How to Do It’ Guides to RI - 3 <ul><li>Fund Manager Selection - Engagement </li></ul><ul><li>Trustees should seek profes...
‘ How to Do It’ Guides to RI - 4 <ul><li>Assessment & Review: SIP & Implementation Policy </li></ul><ul><li>Trustees shoul...
‘ How to Do It’ Guides to RI - 5 <ul><li>Reporting – To Trustees </li></ul><ul><li>Reporting to trustees on RI activity is...
Conclusion & Appendices <ul><li>Useful Networks, Resources & Links </li></ul><ul><li>Appendix A:  Self-Assessment Question...
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Just Pensions 2005 Responsible Investment (RI) Trustee Toolkit

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Just Pensions 2005 Responsible Investment (RI) Trustee Toolkit

  1. 1. Just Pensions 2005 Responsible Investment (RI) Trustee Toolkit <ul><li>The toolkit aims to help UK pension scheme trustees understand more about RI and how they might integrate RI into their scheme’s long-term investment strategy. </li></ul><ul><li>Just Pensions hopes it will be of interest to many stakeholders interested in pension schemes, institutional investment, fund management, as well as individuals interested in RI. </li></ul><ul><li>The toolkit can be read in its entirety or each section can be read as a stand-alone guide. </li></ul>
  2. 2. Introduction to RI <ul><li>What is Responsible Investment (RI)? </li></ul><ul><li>RI combines investors’ financial objectives with their </li></ul><ul><li>concerns about social, environmental, ethical and </li></ul><ul><li>corporate governance (SEE/CG) issues. </li></ul><ul><li>What are the different approaches that can be used by </li></ul><ul><li>responsible investors? </li></ul><ul><li>Engagement </li></ul><ul><li>Integration </li></ul><ul><li>Positive Selection </li></ul><ul><li>Negative Screening </li></ul>
  3. 3. RI Approaches - 1 <ul><li>Engagement a.k.a. “shareholder activism” </li></ul><ul><li>Engagement refers to the processes through which </li></ul><ul><li>investors seek to improve a company’s SEE/CG </li></ul><ul><li>performance by means of dialogue on issues of concern </li></ul><ul><li>and/or exercising voting rights at AGMs. </li></ul><ul><li>Integration </li></ul><ul><li>Integration occurs when active fund managers include </li></ul><ul><li>potentially material SEE/CG risks and opportunities into the </li></ul><ul><li>normal investment analysis, stock weighting and/or stock </li></ul><ul><li>selection processes. </li></ul><ul><li>The analysis can be undertaken by the fund manager </li></ul><ul><li>and/or specialist researcher, who feeds the information to </li></ul><ul><li>the fund manager. </li></ul>
  4. 4. RI Approaches - 2 <ul><li>Positive Selection a.k.a. “positive screening” </li></ul><ul><li>Positive selection is a process by which investors select </li></ul><ul><li>companies that have superior SEE/CG performance. </li></ul><ul><li>Positive selection can come in a number of forms, </li></ul><ul><li>including best-in-class and thematic investment. </li></ul><ul><li>Negative Screening a.k.a. “exclusion” </li></ul><ul><li>Negative screening refers to the exclusion of stocks and </li></ul><ul><li>shares from investment portfolios on SEE/CG grounds. </li></ul><ul><li>An example of a negative screen is to exclude </li></ul><ul><li>companies that make tobacco products. </li></ul>
  5. 5. Regulation & Guidance - 1 <ul><li>SRI Pensions Disclosure Regulation (2000) </li></ul><ul><li>The amendment to the 1995 Pensions Act came into force </li></ul><ul><li>on 3 July 2000, requiring trustees of occupational pension </li></ul><ul><li>schemes to disclose in their SIP: </li></ul><ul><li>The extent (if at all) to which social, environmental or ethical (SEE) considerations are taken into account in the selection, retention and realisation of investments; and </li></ul><ul><li>Their policy (if any) in relation to the exercise of the right (including voting rights) attaching to investments. </li></ul>
  6. 6. Regulation & Guidance - 2 <ul><li>Myners Review of Institutional Investment & the ISC </li></ul><ul><li>Statement of Principles (2001/2002) </li></ul><ul><li>The Myners Review (March 2001) recommended that </li></ul><ul><li>the Government should create legislation encouraging </li></ul><ul><li>shareholder activism. </li></ul><ul><li>Following discussions with the ISC, the Government </li></ul><ul><li>agreed to the ISC’s proposal to pursue this </li></ul><ul><li>recommendation, initially voluntarily, through a set of </li></ul><ul><li>ISC principles. </li></ul><ul><li>The Government agreed to conduct a review to assess </li></ul><ul><li>progress after two years. </li></ul>
  7. 7. Regulation & Guidance - 3 <ul><li>HM Treasury's Review of Progress on the </li></ul><ul><li>Myners Principles (2004) </li></ul><ul><li>The HM Treasury published its Review of Progress on the </li></ul><ul><li>Myners Principles and proposed a number of revisions to </li></ul><ul><li>the principles, including: </li></ul><ul><li>Principle 6 (Activism) to ensure that trustees comply with the ISC Statement of Principles and ensure that the ISC principles are incorporated into fund managers’ mandates. </li></ul><ul><li>Principle 10 (Reporting) to ensure that trustees report on their implementation against all the Myners Principles, make performance assessments available to scheme members and post on the scheme website the key information they provide annually to members. </li></ul>
  8. 8. Regulation & Guidance - 4 <ul><li>Pensions Regulator’s Trustee Knowledge & Understanding Scope Guidance (2005) </li></ul><ul><li>The Pension Act 2004 requires that trustees must have sufficient knowledge of pension and trust law to run their schemes properly. </li></ul><ul><li>The Pensions Regulator published scope guidance for both DB and DC schemes on the topic of trustee knowledge and understanding, including a specific reference to RI and CG in relation to the scheme’s statement of compliance with the Myners Principles. </li></ul>
  9. 9. The Case for RI - 1 <ul><li>The Shareholder Value Case for RI </li></ul><ul><li>Many SEE/CG risks/opportunities are investor relevant. </li></ul><ul><li>Corporate Governance: An assessment by Deutsche Bank on the governance of FTSE350 companies at the end of 2000 & 2003 found that 10% of companies with the best corporate governance structures and behaviour outperformed those in the bottom 10% by 25%. </li></ul><ul><li>SEE Issues: Research commissioned by the Environment Agency Pension Fund found 85% of the literature review studies demonstrated a positive correlation between environmental governance and financial performance. </li></ul>
  10. 10. The Case for RI - 2 <ul><li>The Regulatory & Legislative Case for RI </li></ul><ul><li>The UK government clearly recognises the importance and substantial benefits to shareholders of taking potentially material SEE/CG risks and opportunities into account. </li></ul><ul><li>The Industry Best Practice Case for RI </li></ul><ul><li>The view of industry associations, such as the NAPF and ABI, on RI is best articulated in the ISC statement of principles. </li></ul>
  11. 11. The Case for RI - 3 <ul><li>The Legal Case for RI </li></ul><ul><li>Trustees can legally take account of SEE/CG issues in relation to their investments, so long as this delivers improved or equivalent financial returns, and is subject to the overriding requirements of trust law. </li></ul><ul><li>The Moral & Values-Based Case for RI </li></ul><ul><li>Investors, as owners of the companies in which they invest have a moral obligation to act to mitigate any negative social or environmental impacts of these companies. </li></ul>
  12. 12. First Steps - 1 <ul><li>Section 4 of the toolkit provides best practice first steps for </li></ul><ul><li>four different types of pension scheme: </li></ul><ul><li>The first steps outline: </li></ul><ul><li>Why do it? </li></ul><ul><li>Which schemes are doing this? </li></ul><ul><li>How can trustees do this? </li></ul>
  13. 13. First Steps - 2 <ul><li>DC schemes with members who have diverse values: </li></ul><ul><li>Trustees should ensure that the default fund is managed </li></ul><ul><li>appropriately in terms of RI issues and ensure that social, </li></ul><ul><li>environmental, ethical and corporate governance </li></ul><ul><li>(SEE/GC) risks and opportunities are taken into account in </li></ul><ul><li>stock selection and/or shareholder activism by their fund </li></ul><ul><li>managers and other service providers. </li></ul><ul><li>Examples: Barclays, Friends Provident and Legal & General </li></ul><ul><li>Trustees should also consider offering a screened fund </li></ul><ul><li>option for members. </li></ul><ul><li>Examples: Barclays, Legal & General and BP </li></ul>
  14. 14. First Steps - 3 <ul><li>DB schemes with members who have diverse values: </li></ul><ul><li>For passively managed mandates, trustees should follow </li></ul><ul><li>the shareholder activism route to ensure that fund </li></ul><ul><li>managers or service providers engage with investee </li></ul><ul><li>companies on SEE/CG risks and opportunities and then </li></ul><ul><li>integrate the information into voting strategy. </li></ul><ul><li>Example: British Coal Staff Superannuation Scheme </li></ul><ul><li>For actively managed mandates, trustees should follow </li></ul><ul><li>the integration and shareholder activism route to ensure </li></ul><ul><li>that fund managers engage with investee companies on </li></ul><ul><li>SEE/CG risks and opportunities and then integrate the </li></ul><ul><li>information into stock selection and voting strategy. </li></ul><ul><li>Example: Shell </li></ul>
  15. 15. First Steps - 4 <ul><li>DC schemes with members who have similar values: </li></ul><ul><li>Trustees should offer a range of RI funds, with different </li></ul><ul><li>levels of investment risk, all of which reflect the employer’s </li></ul><ul><li>mission and employees’ values. </li></ul><ul><li>Example: Forum for the Future </li></ul>
  16. 16. First Steps - 5 <ul><li>DB schemes with members who have similar values: </li></ul><ul><li>Trustees should consider adding one or more specialist </li></ul><ul><li>mandates that reflect the employees’ values or employer’s </li></ul><ul><li>mission. </li></ul><ul><li>Examples: Environment Agency & UNISON Staff Pension </li></ul><ul><li>Scheme </li></ul><ul><li>Trustees should also ensure that the other funds are </li></ul><ul><li>managed appropriately in terms of RI issues and that </li></ul><ul><li>SEE/CG risks and opportunities are being taken into </li></ul><ul><li>account in stock selection and/or shareholder activism by </li></ul><ul><li>their fund managers and other service providers. </li></ul><ul><li>Example: Environment Agency </li></ul>
  17. 17. Potential Next Steps <ul><li>After pension schemes have implemented the </li></ul><ul><li>appropriate best practice first steps, the following options </li></ul><ul><li>are open to them: </li></ul><ul><li>Conduct a Portfolio SEE/CG Risk Analysis/Monitoring </li></ul><ul><li>Address Concerns with an ‘Avoid and Explain’ Policy </li></ul><ul><li>Support Positive Selection </li></ul><ul><li>Encourage Better Broker Research on SEE/CG Issues </li></ul><ul><li>Join forces with other trustees via collaborative initiatives </li></ul><ul><li>(i.e. Enhanced Analytics Initiative, Institutional Investors </li></ul><ul><li>Group on Climate Change, Local Authority Pension Fund </li></ul><ul><li>Forum & the Marathon Club) </li></ul>
  18. 18. ‘ How to Do It’ Guides to RI - 1 <ul><li>Getting Started </li></ul><ul><li>Provides some basic tips for trustees on how to get started: </li></ul><ul><li>Complete the self-assessment questionnaire. </li></ul><ul><li>Discuss the results of the questionnaire at your next trustee meeting. </li></ul><ul><li>Make allies with other trustees outside your fund about RI and exchange ideas and learning. </li></ul><ul><li>Developing High-Level Policy </li></ul><ul><li>Highlights that trustees need to decide whether they </li></ul><ul><li>adopt their own policies, adopt industry-wide codes (such </li></ul><ul><li>as the ISC code), adopt the fund manager’s own policy on </li></ul><ul><li>engagement and/or invest some money into specialist </li></ul><ul><li>approaches. </li></ul><ul><li>Implement internally or delegate to a fund manager? </li></ul>
  19. 19. ‘ How to Do It’ Guides to RI - 2 <ul><li>SIPs </li></ul><ul><li>Meet requirements of the amendment to the 1995 </li></ul><ul><li>Pensions Act – ‘SRI Pensions Disclosure Regulation’. </li></ul><ul><li>Implementation Policies & Mandates </li></ul><ul><li>As a SIP only provides the broad framework for a fund’s </li></ul><ul><li>approaches to RI, it is essential that trustees design an </li></ul><ul><li>implementation policy and/or reflect their SIP in some, or </li></ul><ul><li>all, of their mandates. </li></ul><ul><li>Reminder </li></ul><ul><li>In doing the above trustees should always seek professional advice and consult members. </li></ul>
  20. 20. ‘ How to Do It’ Guides to RI - 3 <ul><li>Fund Manager Selection - Engagement </li></ul><ul><li>Trustees should seek professional advice from </li></ul><ul><li>investment consultants. </li></ul><ul><li>Trustees should formally request that their investment </li></ul><ul><li>consultants evaluate fund managers with respect to their </li></ul><ul><li>engagement capability and performance. </li></ul><ul><li>Trustees should ask fund managers questions about RI. </li></ul><ul><li>Trustees should assess how fund managers are </li></ul><ul><li>responding to the pilot Transparency Guidelines for </li></ul><ul><li>Engagement & Voting, which aim to provide a consistent </li></ul><ul><li>framework for disclosure to trustees. </li></ul><ul><li>TUC have expanded the no. of questions it asks fund </li></ul><ul><li>managers on engagement in its annual Voting Survey. </li></ul>
  21. 21. ‘ How to Do It’ Guides to RI - 4 <ul><li>Assessment & Review: SIP & Implementation Policy </li></ul><ul><li>Trustees should formally review the scheme’s </li></ul><ul><li>SIP/implementation policy on a regular basis in order to </li></ul><ul><li>identify any necessary changes in approach. </li></ul><ul><li>This would normally take place annually and/or after the </li></ul><ul><li>occurrence of a major market development. </li></ul><ul><li>Assessment & Review: Fund Managers </li></ul><ul><li>Trustees should also formally review the performance of </li></ul><ul><li>their fund managers on an annual basis to ensure that they </li></ul><ul><li>are delivering on the objectives specified in the SIP/mandate. </li></ul><ul><li>Transparency Guidelines and league tables on </li></ul><ul><li>shareholder activism by investment consultants will provide </li></ul><ul><li>useful information. </li></ul>
  22. 22. ‘ How to Do It’ Guides to RI - 5 <ul><li>Reporting – To Trustees </li></ul><ul><li>Reporting to trustees on RI activity is essential for trustees </li></ul><ul><li>to be able to satisfy themselves that their policy is carried out </li></ul><ul><li>consistently and rigorously. </li></ul><ul><li>For engagement and integration approaches, trustees </li></ul><ul><li>should be provided with reports on a regular basis or </li></ul><ul><li>alongside performance reports detailing aspects of SIP </li></ul><ul><li>implementation. </li></ul><ul><li>Reporting – To Scheme Members and the Public </li></ul><ul><li>The HM Treasury’s Review of Progress on the Myners </li></ul><ul><li>Principles states that it is important for trustees to report to </li></ul><ul><li>scheme membership and the public. </li></ul>
  23. 23. Conclusion & Appendices <ul><li>Useful Networks, Resources & Links </li></ul><ul><li>Appendix A: Self-Assessment Questionnaire for Trustees </li></ul><ul><li>Appendix B: Questions for Trustees to Ask about </li></ul><ul><li>Engagement based RI </li></ul><ul><li>Appendix C: Responsible Investment Glossary & List of </li></ul><ul><li>Acronyms </li></ul>

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