Taking the fiduciary approach to responsible investment

It has been well-publicised that UK pension scheme trustees have changed their ways of working over the past 12 months. This has presented challenges - like the shift to virtual meetings - but also opportunities. For some schemes it has involved grasping the opportunity to do things differently, and better.

Notably, we have seen a hugely increased focus on responsible investment and a greater desire among trustees both to understand their own position - their beliefs and values - and to get advice on implementing something in line with those views. For advisers and managers, this has led to more demand for focused responsible investment meetings, as trustees shift from just wanting to be assured that it is being considered, to wanting to gain a deeper understanding of what is happening in their portfolios.

Changing pension charters, strategy reviews and feedback from members have also concentrated minds. The government's Investing in a Better World Survey showed that 57% of UK investors would like their pension to be invested responsibly, while 47% would want it switched if it was not invested in line with their beliefs. The increase in responsible investment options in the market has also created greater awareness and further stimulated interest and discussion.

A fiduciary approach

We see two parts to implementing responsible investment on a fiduciary basis for schemes; having different building blocks to include in portfolios and having a framework that is flexible enough to allow implementation in line with beliefs. The option of partial delegation - via use of fund solutions - is also becoming increasingly popular.

When considering building blocks for portfolios, ESG integration is a critical starting point and has rapidly become the baseline that our investors expect. Integration makes investment sense. It ensures that ESG risks and opportunities are assessed, and robustly incorporated into investment decision making. A manager fully incorporating these areas should intuitively deliver better risk-adjusted returns. It also covers whether underlying managers are responsible stewards of the capital they manage - whether they are making use of voting and engagement with companies to influence change. As a fiduciary manager, we are seeing more expectation from schemes that we will engage on these issues with underlying managers to influence positive change in their responsible investment practices.

Aligning to beliefs

On top of integration, we are also seeing increasing demand for investment options that align to specific beliefs. Many schemes wish to exclude certain sectors, to decrease the carbon footprint of their portfolio, or have a positive impact, often on environmental or social grounds - and both managers and fiduciaries are launching solutions to help facilitate this.

Many schemes are seeking options that incorporate both integration and impact approaches. A flexible portfolio construction framework allows schemes - both large and small ­- to use those options to reflect their beliefs more effectively in their portfolio.

When our fiduciary business works with schemes, the aim is to provide a way to help them achieve their investment objectives in the way they want. Their approaches differ; some schemes give us full flexibility, while others specify the funds they want to hold and the allocations to them. With other schemes, their approach may be to choose to invest directly, sometimes just to one or two of our fund solutions as part of a broader portfolio.

Overall, we believe the increased awareness of and willingness to engage on responsible investment is a significant positive as well as a theme that will continue to gain momentum. Schemes are developing their beliefs and, as the variety of responsible investment options available to them continues to grow, you can be sure that this is an area that will only see further expansion.

Tim Manuel is head of responsible Investment at Aon and Philippa Allen is a portfolio manager in the firm's fiduciary management team.