Trustees that fail to take ESG seriously will suddenly find that they - rather than climate change - are the hot topic, writes Stephen Fallowell

The long, hot summer of 2018 will takes its place in the folklore of weather stories as did the summer of 1976. I am old enough to remember that previous heatwave and the talk then of apocalyptic doom.

This time pundits have talked of this summer as being a ‘tipping point’ when even climate deniers will accept the fact that the earth is warming.

ESG investing are you ready

ESG investing - are you ready?

But will that be the case or, when we have a period of cool damp summers which happened after 1976, will the facts become fake news and the summer of 2018 become just part of our collective weather folklore?.

The immediate aftermath of 1976 did not produce any major changes in government policy or alteration in investment startegy, particularly as pension trustees were subject to strict fiduciary legal duties following the Cowan v Scargill case of 1984.

The case established pension trustees’ duty to act in the best financial interests of their scheme’s beneficiaries. It also stated that pension scheme trustees should largely put aside their own moral and ethical principles when investing pension scheme assets.

The Scargill case stated that trustees should largely put aside their own ethical principles when investing pension scheme assets

There are, however, significant differences to the events of 1976 and 2018. Firstly the 2018 events have been worldwide rather than localised. Secondly the temperature rises are the literal proof of the hypothesis of climate change rather than a warning.

And thirdly the reporting of droughts, withered crops, wildfires and human tragedy is fundamentally different from the image of Denis Howell (Minister of Drought 1976) huddling under an umbrella

Governments, despite Trump’s withdrawal from the Paris accord, have recognised the issue of climate change and are taking positive steps to deal with the problem.

Commercial enterprises recognise the change in public perception and the legislative position Governments are adopting. They are also exploiting the opportunities that new technologies provide particularly in environmentally friendly energy sources.

So how are investors to react to this changing environment? The Association of Member Nominated Trustees (AMNT) developed ‘Red Line Voting’ on environmental issues to enable pension funds to ensure that companies they invest in are not only proactive in their environmental processes, but are also developing actions to provide long term sustainable growth.

Environmental issues that impact a company’s long-term sustainability should be considered when making investment decisions

‘Red Line Voting’ follows the UN Global Compact principles. Ban Ki Moon the then UN General Secretary stated: ‘Saving our planet, lifting people out of poverty, advancing economic growth… these are one and the same fight. We must connect the dots between climate change, water scarcity, energy shortages, global health, food security and women’s empowerment. Solutions to one problem must be solutions for all.’

The Law Commission guidance though still acknowledging the Scargill case has now made it clear that environmental issues that impact a company’s long-term sustainability should be considered when making investment decisions.

So environment is a ‘hot topic’ for Pension Trustees. Knowing how to react and plan in an ever changing landscape has always been difficult, but what is clear is the importance of considering environmental changes when undertaking investment strategies, otherwise Trustees may become the ‘Hot Topic’.

Stephen Fallowell, Management Committee Member, Association of Member Nominated Trustees

The Scargill case stated that trustees should largely put aside their own ethical principles when investing pension scheme assets