Investment Governance – much more than box ticking compliance

by Brendan McLean   •  

A range of new regulations have recently come into force that affect trustees in relation to their investment governance, including:

  • CMA Order
    • Setting strategic objectives for investment consultants.
    • If relevant, carrying out a fiduciary management tender exercise if a competitive tender was not originally done.
  • Investment and Disclosure Regulations
    • Updating the Statements of Investment Principles (SIPs) to take account of financially material considerations, including Environmental, Social and Governance (ESG) factors, non-financial matters, and stewardship.
    • Updating the SIP to include policies on investment management arrangements and provide additional information in the stewardship policy.
    • Producing an Implementation Statement detailing how the scheme follows the policies within the SIP such as engagement and voting policy, including the most significant votes cast by trustees, or on their behalf.
    • Publishing the SIP and Implementation Statement on publicly available websites.

Might this result in box ticking compliance?

Where trustees regularly review the strategic objectives for their investment consultants, they should be able to identify areas of improvement. Whilst only small improvements may happen on an individual basis – potentially making the process feel like a box-ticking exercise – over a longer period these incremental enhancements will result in a better service for trustees. Areas of improvement include: better value for money, more consultant engagement, greater fee transparency and a better service that adds more value to trustees.

Updating the SIP for ESG, investment manager arrangements and stewardship, as well as producing Implementation Statements, may again seem like an unnecessary exercise, especially for schemes with small governance budgets. But, if trustees dig a little deeper, and understand the premise behind these updates, there could be long-term benefits, including:

  • investment managers increased awareness of ESG factors and how they impact returns
  • value created through engagement with companies to improve their long-term performance
  • investment managers being more incentivized to align investment strategies and decisions with the trustee’s policies, which will in turn create a better alignment of interests
  • more disclosures to members will demonstrate the value of trustee’s policies and their positive impact on investments.

The new regulations may be viewed by some as compliance for the sake of compliance – but over time incremental improvements can result in a material benefit for both trustees and members – and potentially benefit wider society as a whole.

Further reading

Regulator demands actions, not just words!

by John Wilson   •  

Pushing data up the trustee agenda: do you have a plan?

by Colin Wheeler   •  

As busy as … the Regulator!

by John Wilson   •  

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