Speaker 0:
Hello and welcome to another episode of the consultant corner here on Asset TV. Today I'm joined by Vanessa Hodge, who is a partner at Mercer. Hi, Vanessa. How are you?

Speaker 1:
Hi. I'm very well, thank you very much.

Speaker 0:
So, Vanessa, today we're gonna be broadly speaking, talking about ESG. Um, my first question is, what does good stewardship stewardship look like for pension schemes? And how can they hold their asset managers to account?

Speaker 1:
Yeah, So I'm gonna start with the definition of stewardship, which is the allocation, management and supervision of capital to create long term value for beneficiaries and stewardship, activities of voting and engagement. They're ways that investors can use their influence with investing companies and issuers to maximise that overall long term value.

Speaker 1:
And regulators and wider society are encouraging pension trustees to do more in terms of stewardship. I think few schemes actually have the resources needed to make decisions on individual votes, maybe directly lead on company engagements and instead rely heavily on their investment managers. So a large focus across the pensions industry over the last few years has been on reporting the annual voting and engagement activity.

Speaker 1:
This is disclosed in annual implementation statements. And these statements are a way for trustees to say we're actually carrying out what we commit to do in our policy statement on stewardship

Speaker 1:
but good stewardship. It goes beyond the reporting and requires trustees to be a bit more forensic with the information to better understand how their asset managers are voting and engaging on their behalf and a cover of voting first, which actually goes beyond equities. As some non equity fund structures require votes on auditor appointments or signing off accounts, for example,

Speaker 1:
and trustees now need to define their significant votes. And this could be based on the size of a holding could be thematic like a focus on climate change, diversity, inclusion or modern slavery. For example. It could be related to a particular company or sector, and ultimately it's based on each trustee board's sustainability beliefs and preferences. And it's important to note that whilst trustees have their definition,

Speaker 1:
it may be different to how their asset managers define significant votes. So are asset managers voting in line with their stated in voting policy

Speaker 1:
and, if not, ask them why they've deviated and how well aligned is the asset manager's definition of significant votes with yours as a trustee board. And if there is a significant deviation, is it still appropriate to invest with that asset manager, though I'd imagine that most asset managers are going to be broadly aligned with most trustee boards and their definitions, and for those with segregated mandates, then you might want to wish, considering including voting preferences in your I MA S, if that's appropriate

Speaker 1:
and actually for pool funds, we're seeing some asset managers offer voting choices, but it's actually worth taking the time to fully understand these proxy approaches to make sure that a chosen voting structure will actually do what you expect it to do and not create unintended risks or a governance burden. I mean, for example, if you opted for a

Speaker 1:
default voting choice that always voted for a shareholder resolution linked to climate change, there may be some resolutions that, if password require significant change of the company that may be over and above what's needed to support the climate transition and could create a financial strain. So is that in the investor's best interests to fully understand what proxy voting structure will do

Speaker 1:
and then coming on to engagement. This process is more labour intensive, and some engagements can take several years. I think most trustee boards won't have the resources to engage directly relying on their asset managers. So again, the question is, are your asset managers acting in line with their state,

Speaker 1:
Its stewardship policy? And if not, why not? And what is your asset manager engagement and escalation process? Now? What is that catalyst for them to say? Enough is enough and actually selling a holding? And would they ever reconsider buying that holding again in the future? And then there are collaborations that trustees can be part of to take part in collective engagement. One example. Being climate action 100 plus

Speaker 0:
OK, and there's been a lot of talk recently about investing in biodiversity

Speaker 0:
and natural capital. Can you just outline these opportunities

Speaker 1:
for us?

Speaker 1:
Yeah, So the focus on on nature related risk is really ramped up after the publication of the Task Force on Nature Related Financial Disclosures, or TNFD recommendations, which came out in September 23. And these follow a similar structure to TCFD. The climate disclosures require entities to understand their exposure to nature related risks and opportunities. So in the near term, there is no requirement for trustees to report in line with the TNFD

Speaker 1:
yet. But there are still things that trustees can be doing now. So, firstly, what are your policies on nature? How's this embedded into your governance process? And nature covers so many areas like biodiversity, habitat loss, water usage, deforestation.

Speaker 1:
So I think it's good to understand which of these themes are important to the trustees, so you can have a clear focus. And secondly, consider nature themes as a core stewardship principle. Embed this in your definition of significant votes and understand how your asset managers consider nature as part of their stewardship activity. Thirdly, start mapping your portfolio exposure to your priority sectors, uh, related to nature. To understand the PO potential

Speaker 1:
on nature related risks, the TNFD defines priority sectors as those either most exposed to nature risks, either because of a sector's impact on nature. So think about resource use, water use. Mining construction is a good example. Or maybe the sector's reliance on nature so thinking about sectors needing natural resources part of their business, So agriculture, food and beverages are other good examples.

Speaker 1:
A. The Trust is looking to allocate to natural capital. There are funds in real asset space which invest in timberland and agriculture. And we also see thematic equity funds, sustainable bond funds and private market funds with objectives to allocate to support the prevention of biodiversity loss, for example, or maybe supporting the circular economy.

Speaker 1:
And if you're not familiar with the circular economy, that's where we move from that linear take make throwaway model to a make use, reuse, recycle and keep a product and its parts in circulation for as long as possible.

Speaker 0:
OK, and lastly, how do schemes get themselves on a path of being net zero by 2050? And could this be too digital? Too

Speaker 1:
late?

Speaker 1:
Yeah, Setting a 2050 net zero target is the easy part. The challenge is actually getting there. So the most important part of a investors climate transition is setting interim targets. And those pension schemes that have set climate related targets typically have decarbonisation targets based on carbon intensity metrics like a carbon footprint and focusing on interim dates like 2030.

Speaker 1:
And I think it's important not just to focus on one metric, it's easy to decarbonise the portfolio, but that will have no real world impact if somebody else buys what you're selling. And they may not have the same beliefs around supporting the low carbon transition as you. So looking at all metrics such as forward looking metrics, portfolio alignment. Looking at those companies that are on that path to decarbonising and moving to a low carbon economy is really important.

Speaker 1:
And I also believe it's important to have that seat at the table. And that comes back to our first discussion point on stewardship and being able to influence investing companies and issues to to maximise that overall long term value, as well as influencing a positive, real world change towards that low carbon economy.

Speaker 1:
And is this too little too late? Well, the Paris agreement aims to achieve warming well below two degrees related to pre industrial temperatures. And whilst the 1.5 or two degree world is expected to see greater physical impacts than we're seeing today, it's gonna be much better than the three degree world. So any action that we can take collectively from the perspective of either an asset owner and as individual consumers is really important for making our futures a little bit more bearable.

Speaker 1:
But ultimately trustees need to think about their wider investment and funding objectives, looking at all of their relative risks and, ultimately, their fiduciary duty to paying members benefits when they fall due. But climate change is most certainly a risk factor that needs to be considered.

Speaker 0:
OK, Vanessa Hodge. Thanks for joining me.

Speaker 1:
Thank you very much.