This report examines the approach to climate change risk by the UK’s largest master trusts. The report reviews 16 master trusts’ environmental, social and governance (ESG) policies and practices, focusing on the work of the trustees and their engagement with investee companies on ESG practices and risk management.

Governance

This author identifies the absence of a structured engagement with a range of stakeholders, stating “there is limited interaction with policy-makers and other industry stakeholders over ESG risk management.”

Strategy

The author notes that “asset owners are acknowledging that their investments have a broader impact on their beneficiaries’ lives. However, there is also a lack of oversight and attention to stewardship, which undermines the attention being given to impact.” However, it is encouraging that some schemes are now actively engaged in stewardship and governance of their holdings.

Risk management

The author states that “Investors face an ever-changing set of risks driven by aggregate changes in the physical climate, but also policy and market changes.” It urges master trusts to “engage robustly with remaining holdings with a clear procedure for escalation, including divestment, where engagement is not working.”

Disclosure

The author states that “questions around the adequacy of the data provided by companies on ESG issues underscores the need for active stewardship of such risks.” The author recommends that master trusts publish their full voting records.

The review aimed to establish the level of focus UK master trusts place on ESG considerations as part of the investment process. The review looked at how these master trusts were working towards understanding and incorporating ESG factors when making investment decisions and stewarding their investments. The report produced four groups to demonstrate the schemes’ position in their Responsible Investment (RI) journey relative to their peers; learning group, building group, implementing group, leading group. The findings from the report highlight that the master trusts scored varied significantly. Whilst it is positive to see some schemes changing their asset allocation to incorporate ESG risk factors, action on stewardship remains low.

Recommendations

The author recommends that schemes extend the ESG allocation to all of their equities, consider how to incorporate ESG into other asset classes and reduce exposure to the fossil fuel industry, as managing the risks also aligns with their fiduciary duties. The report also recommends that “master trusts should have a clear voting policy on ESG which they communicate to their asset manager”, and “schemes need to have robust and data-driven policies for dealing with climate risks.”

While there have been positive developments, “the world is facing a climate emergency, ecological crises, and inequality is rife. This demands bolder, smarter thinking fit for the 21st century. Policy makers should consider that in addition to risk and return, investors like master trusts should also be charged with thinking about the impact their investments have on people and the planet, alongside financial considerations”.

The author recommends a more active approach to engagement and stewardship alongside a clear voting policy on ESG issues. The author ultimately calls on policymakers to consider the wider impact of investments on people and the planet as well as financial considerations to ensure the sustainability of products in the 21st century.