Gulf Oil Spill: is your pension in Deepwater?

The BP oil spill has demonstrated all too clearly that environmental and social risks are also financial risks to our pensions. Yet despite warning signs, few investors exercised their rights as shareholders to question BP on its environmental and safety record, and many remain complacent. FairPensions and our supporters have been petitioning the Pensions Minister Steve Webb for tighter regulations to ensure pension funds have to tell you, their members, what they are actually doing to monitor and manage environmental and social risks.

FairPensions argues that the Deepwater disaster is a ‘canary in the mine', illustrating the potential consequences of a neglect of environmental, social and governance (ESG) risks which we have found to be pervasive in the investment and pensions industry. Regrettably, it indicates an underlying trend which we believe presents a risk of worse financial and economic shocks in the future. Our research, and our years of experience working with pension funds and fund managers, suggests a worrying level of complacency about ESG risks in the investment community, with many pension funds doing little to protect their members' money from ESG risks - despite accepting that such risks can be material.

Although our campaign has prompted the government to respond, the initial response is disappointing. We do not agree with the government's view that the existing regulations on disclosure for pension funds are adequate. The current regime is not delivering transparency for those whose money is at stake. In addition, the significant gap between policy and implementation - a consistent finding of our research - strongly suggests that the current requirements are not catalysing higher standards of behaviour. Instead, all too often they are prompting little more than box-ticking, or worse, general statements of concern that mask inaction.

Furthermore, the current regulations require only that schemes state their policy, if any, on the exercise of shareholder rights. This is distinct from our proposal that funds should report on the actual exercise of shareholder rights - for instance, by disclosing voting records - and clearly does not deliver the same benefits in terms of transparency.

Stronger reporting standards would address these problems in several ways. Firstly, it would require funds to actively monitor compliance with their policies - and what is monitored is much more likely to be managed. Secondly, it would help drive consumer demand for engagement on ESG issues up the investment chain, making it easier for members to transmit their preferences for improved risk-management up the investment chain.

Rest assured that FairPensions will continue to press the government on this issue. This is only the start!