The push and pull factors leading to digital, ESG and a Fiduciary Management transformation

The push and pull factors on trustees and pensions schemes inevitably become the push and pull factors on Fiduciary Managers, as they adapt to meet the needs of their clients. COVID-19 accelerated the digital transformation of pension schemes and Fiduciary Managers responded with new governance technology. As we look forward from here, what push and pull factors are at play? New research suggests Fiduciary Managers need to up their game once again, to help trustees understand and manage the ESG and climate risks they face.

There’s no doubt that the pandemic transformed working practices. At the beginning of 2021, we saw the demise of the quarterly meeting, 80% of trustees felt it had lost its relevance[1]. We dubbed this as a transformative shift to ‘continuous governance’.

Changes like this often have a combination of ‘push’ and ‘pull’ factors. Push factors included the need for trustees to meet more regularly to stay on top of the rapidly evolving pandemic situation. It pushed trustees to adopt technological solutions to meetings. Video calls, secure online platforms and funding-level trackers became increasingly familiar tools. Indeed, at the beginning of 2021, 75% of trustees felt they needed better access to information. Just one year on 79% felt they had better transparency through the use of interactive tools to govern their investment arrangements[2]. The ubiquitous availability of digital tools facilitated the widespread shift to shorter, more frequent, and more targeted meetings.

There are, of course, pull factors. It is simply far more convenient for trustees and their advisers to gather online than to travel across the country to meet in person. Given the excessive demand the information age has on our limited capacity for attention shorter, targeted meetings with clear outcomes have a potent attraction[3]. These pull factors mean virtual and hybrid meetings will remain relevant despite working environments having opened back up.

Digital transformation is not new to pension boards. Many have been going through this journey long before Covid-19. The pandemic was an accelerator. Perhaps technology is finally coming of age for pension scheme trustee boards. But are trustee appetites for data satiated? Far from it. Our recent survey showed 89% favour greater use of risk dashboards to better quantify the investment and non-investment risks they face. This needs to go beyond the three pillars of integrated risk management (funding, covenant, and investment). Dashboards must also inform decision making on other aspects that may affect the desired outcome, such as ESG and climate risk.

The push and pull factors of regulation and impending environmental crisis make ESG integration inevitable. As trustees’ ESG and climate requirements grow, they need better access to governance tools to engage and ensure alignment with their providers. There is more and more ESG and climate data available today, with an increasing array of tools available for trustees to ‘footprint’ where they are. This can provide an effective baseline and assess how the current investment arrangements sit versus trustee beliefs. Not only is it important for trustees to understand where they are today, but also looking forward from here. Two-thirds agree they should set "climate milestones" to frame how their investment strategy might evolve, implementing strategies that achieve ESG goals. Whilst this is a mandated priority for only the largest schemes in 2022, it could apply to all schemes by 2025[4].

The push and pull factors on trustees and pensions schemes inevitably become the push and pull factors on Fiduciary Managers (FMs), as they adapt to meet the needs of their clients. Third-party evaluators also have a big role to play in pushing the industry forward and driving competition. As highlighted in recent research by EY-Parthenon, when it comes to ESG, not all Fiduciary Managers are born (made) equal. There exists a wide range of capabilities across the market and various approaches taken. The quality of ESG reporting provided by FMs to their clients varies considerably in quality, breadth, depth, and complexity. For example, less than 40% provide individual scores and ratings for E, S and G, benchmarking of ESG scores or non-carbon ESG metrics[5].

In addition, ESG integration within investment processes does not carry the same meaning across FMs. Most FMs focus their ESG efforts on the manager selection and monitoring processes. Very few FMs apply ESG considerations within investment strategy-setting processes. For trustees and scheme sponsors, it is important to understand how far, and how fast, their FM is integrating ESG considerations into their investment approach. With the right approach, it’s possible to integrate ESG not only across equities but also credit, alternatives, cashflow matching and Liability Driven Investment. And this needn’t be at the sacrifice of return—a pervasive ESG myth that needs debunking.

Continuing to deliver on the needs of pension schemes requires continuous investment, innovation, and evolution from Fiduciary Managers. Whether it be adapting to new working practices, satiating data appetites, or meeting new regulatory requirements, technological transformation will be one of the key enablers.

[1] Source: Lorenz-Spreen, P., Mønsted, B.M., Hövel, P. et al. Accelerating dynamics of collective attention. Nat Commun 10, 1759 (2019).

[2] Source: Schroders Solutions, Navigating the key issues facing schemes 2021

[3] Source: Schroders Solutions, Navigating the key issues facing schemes 2022

[4] Source: EY-Parthenon, ESG investing under fiduciary management, September 2021

[5] HM Treasury, A Roadmap towards mandatory climate-related disclosures, November 2020