Simon Ellis is a seasoned leader in asset management, wealth management, and DC pensions in the UK. With extensive experience in governance and investment strategy, he currently holds key roles across major financial entities:
- Chair and Trustee Director, LifeSight Limited
- Chair and Independent Non-Executive Director (INED), Morgan Stanley Investment Management (ACD) UK
- INED, Marlborough Investment Management Ltd.
- INED Chair, GAM Sterling Management Ltd (UK ACD)
With over 35 years in the asset management industry, Simon has been at the forefront of evolving investment practices. He brings a deeply practical understanding of fiduciary duty, regulatory challenges, and stewardship, offering valuable insights to trustees, asset owners, investment consultants, and policymakers.
1. Trustees and ESG: An Evolving Role
Darshita Gillies: How has the role of pension fund trustees evolved in the context of ESG and sustainability?
Simon Ellis: Quite clearly the long term risks associated with climate change, and a number of related topics captured under the generic heading “ESG,” are of systemic concern to pension scheme members given the very long timeframes over which they will be saving and spending their pension scheme assets.
I think many commentators miss this dimension when talking about investment policy, but for trustees it is a fundamental concern. I would argue that not considering these factors in detail would be a dereliction of duty.
I would observe that sustainability factors and impact assessments were incorporated into the thinking of the largest global asset owners many years ago, perhaps reflecting their typically larger societal role ( I’m talking about the largest public pension and sovereign funds,) and that their lead has been taken on by the majority of company-funded schemes and their advisers – for all the right reasons. The key change therefore is that sustainability is now a core consideration in forming the long-term investment policy, and that trustees have learned how to incorporate sustainability risks and returns into their core thinking.
2. Challenges in ESG Integration
Darshita Gillies: What are the biggest challenges in integrating ESG into pension fund strategies?
Simon Ellis: There are two key challenges. The first is data, and the second is fiduciary duty.
If I may take fiduciary duty first, in the UK specifically there is a well-recognised lack of clarity as to the extent to which trustees should consider what are described as “material non-financial factors” in the formulation and execution of investment policy. In other words, trustees may want to take a position on sustainability factors to reflect long-term risk concerns, but that may come with the risk of performance variance from a policy with no sustainability factors incorporated. These short term fluctuations make many trustees nervous about following their convictions, or in many cases their advisors’ suggestions. We need greater clarity in the legal framework relating to fiduciary duty, and I know there are steps being taken to address this by people like Shareaction.
At the same time, and in a way the more fundamental challenge, is data. I guess we all know that the underlying data on sustainability factors is often febrile, and highly variable depending on the source you use. We know too that data collation within the underlying investments lacks consistency, and I fear that the current push-back in certain countries is making that worse.
3. Aligning Returns with Sustainability:
Darshita Gillies: How might schemes balance financial performance with long-term sustainability goals?
Simon Ellis: Well I don’t think you can separate the two.
I can only speak directly from a Mastertrust perspective, but it is a regulatory requirement to include sustainability risks into the Statement of Investment principles. Quite simply, you be authorised without thinking through, defining, implementing and monitoring sustainability in your default arrangements, and I believe almost the whole sector provides additional self-select options for those who wish to go further or have particular areas of focus.
It is common practice to express a net-zero target and timetable with milestones to measure adherence and effectiveness of the policy. Some are looking at other subsidiary goals, including for example on deforestation or biodiversity, in the belief that these are systemic risks of a shorter term nature and with the potential for additional returns through mitigation strategies.
I want to emphasise that sustainable policies are not about risk avoidance, but how to mitigate these long term risks and take advantage of the investment opportunities that emerge from businesses who are benefitting from the global focus on sustainability management.
4. Pension Funds Driving Engagement
Darshita Gillies: How can pension funds drive meaningful engagement with companies on sustainability issues?
Simon Ellis: This often depends on the size of the scheme and the nature of its investment management structure. For the very large public schemes, Aussie Supers for example, with their own investment management teams, direct engagement with investee companies is quite typical. Often such schemes will have a team of sustainability analysts and engagement professionals, who will build and enforce the engagement policy.
For most schemes however, they rely on their underlying investment managers to engage in line with some generally agreed principles, and then monitor how the policy was executed in practice. Many large and mid-sized schemes delegate execution of parts of their engagement policy to specialist firms, where the benefit is that they can aggregate the weight of multiple schemes’ assets to gain a stronger voice.
Right now I think what is most important is for trustees to hold their nerve. The backwash, notably from the US, against ESG does not reflect the reality of the long-term risks or opportunities faced by members, and I hope schemes will continue to press for changes in investees behaviour.
5. Stewardship’s Impact on Pensions
Darshita Gillies: What role does stewardship play in ensuring better retirement outcomes for members?
Simon Ellis: There is a popular observation often made in the pensions industry, “Who wants to retire into a World that is burning?”
I think stewardship applies in two areas. First is that from a pure investment perspective trustees must take into consideration the extended time horizons over which their members benefits will be built and withdrawn. To say that sustainability has no part to play in that is just irresponsible, so trustees must oversee the underlying investments through a lens that uses ESG factors as a sign of ‘quality,’ and at the same time engage with those investments, as they typically do, to be sure they are being managed professionally – regardless of ESG factors.
Secondly, I come back to the ‘burning world’ point. Trustee Boards have to attest annually that they are doing their best to secure “best member outcomes.” Does that mean just getting them the biggest pot at retirement? Well no, because they are now required to include what happens with that pot, including the choices members make and to consider how members will fare in retirement. Some may say ‘stick to the money question,’ but is it reasonable to look at the pot in complete isolation from other factors? There is societal pressure to think more broadly, and feedback from employer sponsors and member representatives is often that trustees should think bigger. Whether people like it or not, the centrality of pension schemes as holders of capital in the wider economy will inevitably mean trustees have a form of power that they must use wisely.
6. Evaluating Asset Managers’ Stewardship Efforts
Darshita Gillies: How do you assess the quality and impact of stewardship efforts by asset managers?
Simon Ellis: I should declare an interest here Darsh. My professional background is over 35 years in asset management, and I sit on the Boards of three asset managers today.
There is quite a lot of criticism of asset managers on this topic, and even more cynicism, but I know much of this is misplaced. That is due to a misunderstanding of how asset managers fit in the value chain.
Asset managers are commercial organisations who thrive by delivering investment outcomes in line with or above clients’ expectations. Note that I did not say ‘performance,’ and that is because that has become a lazy word for short term outperformance against peers or an index. Historically that simplistic form of performance has been key in selling funds to general IFAs and the mass market, but the vast majority of flows these days are determined by professional fund analysts or consultants, who look carefully at processes, resources and people to assess how consistently a manager might deliver against a more tightly defined investment objective.
In this context, the buyers, including pension schemes, will have a view on what sustainability characteristics they want to see, if any, and asset managers have had to build capabilities to meet those more specific expectations.
Some managers have built broad and robust systems for this, others have done little because their clients are less focussed on it.. I actually believe it’s quite easy to understand how well-placed an investment firm is to deliver to a sustainability agenda, if you bother to look hard enough. Some firms have made a huge effort to achieve excellence, some do enough to comply with TCFD and others have dedicated their business to it. There is plenty of choice out there, and I would not criticise firms who have chosen not to compete, as long as they are honest about it.
7. Supporting Trustees on ESG integration
Darshita Gillies: How can asset managers and investment consultants better support trustees in ESG integration?
Simon Ellis: I think we are past the point of deciding whether to incorporate ESG factors or not. Attention is now focused on the areas requiring skilled support, which are Policy and Proof.
On the policy side, guidance as to which factors to focus on, what targets to have and how to apply policy in different asset classes should be under regular review.
Then comes the question of proof – how to measure and monitor progress? This is where the data challenge is central. Trustees need help accessing and processing the data, and then assessing the outputs to reach clear and fair conclusions on how the policy is being effected and whether it is working. After several years of growing adoption of ESG factors by many schemes, there is a general need to get some better quality attribution of the investment outcomes that should be attributed to those factors vis a vis other performance metrics.
There is, however, another important point here. We need to make the outputs of all this more relevant to members. We get a lot of feedback from members wanting to know more about how their money is being invested, and what good is it doing? There is a clear demand for information on the real world impact of their pension investment, and I think subjects such as biodiversity and deforestation are ones where a visible and measurable difference can be made.
8. Innovations in Data and Technology
Darshita Gillies: What innovations in data and technology are improving ESG reporting and decision-making?
Simon Ellis: I’m not directly involved with data vendors in this space, but my impression is that a small oligopoly has formed, by accident, for the bulk of data being used by the industry. That might explain why it is not as comprehensive, detailed or consistent as most market participants would like.
The good news is that there are therefore opportunities for Fintechs to address shortfalls in the market, either by providing specialist services which the giants don’t address well, or even by being smarter in the use of multiple data sources to qualify the core data and make it more comprehensive, detailed or reliable. I note, for example, that Maanch is addressing client reporting in an innovative way that addresses some specific needs of managers and trustees, which the ‘big boys’ have overlooked.
9. Regulations Shaping Pensions
Darshita Gillies: What regulatory developments are shaping the future of pension schemes and responsible investing?
Simon Ellis: The most obvious ones are TCFD and SDR since these are headline pieces of regulation for us to conform with.
However the more subtle piece is the pressure on schemes to demonstrate how they are incorporating sustainability into their investment and engagement policies on a day to day basis. The TPR are persistent and insistent with scheme managers and trustees to show progress, and to demonstrate rigour in target-setting, monitoring and oversight.
10. Strengthening Trustees’ Approach to Responsible Investing
Darshita Gillies: What advice would you give to trustees looking to strengthen their approach to responsible investing?
Simon Ellis: Think hard, be clear and constantly strive for better evidence.
By this I mean spend time on determining what your policies should be, ensuring that the process is founded on data and well-founded views, not on biases or opinions. Get to the point where you can be clear on the rationale and long term benefits of the policy to members.
Then do your very best to articulate that to key stakeholders, with clear reasoning, and tangible objectives. It is important that everyone involved in running the scheme understands their role in meeting those sustainability goals, and how they will be measured. Sponsors and members want to know how to hold the trustees to account on progress. I am certain that if the adoption of ‘ESG’ for a scheme is seen as driven by emotion, or trying to conform with some sort of social agenda, trustees will be found out and criticised for poor practice. It’s more of a science than an art. This stuff is hard; it heavily rewards using experts to help understand the issues and what is both possible and measurable.
Finally, it’s not static. There is a need for regular re-appraisal of the policy and its execution as the issues change, understanding deepens and the data improves. Use the spirit of ‘kaizen’ to keep everything fresh and relevant. For example, we are diving more into biodiversity and deforestation issues, pushing our service providers to help us more as we understand the opportunities and the pressures created by corporate and government actions in these areas. These were background questions before, but with more research and asking some smarter questions we’ve pulled them up for extra focus over the last 12 months.
Note: The views expressed in this discussion are solely my own and do not represent the positions of any organisations I am affiliated with. This piece is intended to share insights on industry-wide challenges and opportunities, without attributing perspectives to specific companies or implying any formal connection between them.
