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ESG implementation has been ‘zero to 100’ but lacks ‘fundamental thinking’, expert says

24/07/2020 Posted by IAPF | Comments(0)

Environmental, social and governance (ESG) has been “zero to 100” when it comes to implementation, products, and consulting advice, but there hasn’t been “fundamental thinking from the ground up about what the topic is about”.

This is the view of the Bank of Ireland group pensions chief investment officer, Paul Droop, who was speaking about the topic at the Irish Association of Pension Funds’ virtual Investment Conference, Wednesday 22 July. Droop said ESG ended up in his inbox because of primarily “regulatory forces”, such as the IORP Directive.

“The way I see the issue and the topic at the moment in the pensions and investment industry is that there seems to have been a rush from zero to 100 to implementation, to product and to consulting advice. I haven’t witnessed the same sort of fundamental thinking from the ground up about what the topic is about, what we’re discussing, and hence how it should be approached and what trustees should do about it,” he explained.

He believes there are two different facets to ESG, which he says are in the regulation, if “you read it carefully”.

“One thing that initially would frame my point of view is that I see clearly two distinct facets to this, and these are two facets that are brought out in regulation if you read it carefully. One is that there is something called ESG policy and ESG policy is not financial.... It may have financial ramifications if you enact it, as clearly many things do, but the decisions are based on non-financial factors.

“The next facet though is risk management, and there is something called ESG risk, I would acknowledge, and hence you might have a requirement to have an ESK risk management policy.”

Droop believes the industry is “losing sight” of these two different features of this single topic. He said this is “muddying the regulatory requirements of trustees”. As a result of this he thinks the industry is “creating issues in how you approach the entire problem” and is not coming to the most optimum outcome for members.

Another panel member, ESG Ireland founder, Vincent McCarthy, agreed with Droop that “there is some confusion around terminology”. However, for him, ESG did "not arrive in his inbox through regulation". Instead he sees regulation as a response to the problems caused by things such as climate change or human rights issues etc.

He believes that in the future investors will consider the “risk, return and impact” when it comes to making investment decisions.


Also speaking on the panel was Independent Pension Scheme Trustee, Charles Coase, who serves on both DB and DC trustee boards in Ireland and the UK. He views ESG as an element of the investment strategy, rather than being a separate topic.

“If you consider the DB trustee first of all, the key question is ‘can we pay the benefits when they are due’, that leads you onto consideration of funding, the strength of the sponsor and the investment strategy working towards that goal of self-sufficiency, some might be on the buyout route, but being able to stand on our own feet without call on the sponsor.” He said ESG is an element of this but fundamentally DB schemes need to think about funding first.

Read the original article here

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