By Lydia Fearn, Head of DC, Redington
I would argue that this isn’t only the millennials way of thinking, but across generations. My children have certainly grown up in a more climate aware culture. They are taught at school what recycling is and on many occasions when we visit friends they often ask “where do I put my package for recycling”. This is something I wouldn’t have dreamed of when I was their age, but it is something I embrace now. The fact is we need to look after our planet better and invest in a way to sustain it for our future generations – that includes not just the climate, but investing in a better way for the benefit of everyone.
Despite this, we are not yet seeing much change to the investment strategy of DC schemes. That being said, we have seen some progress. Investment firms are waking up to the increased interest in ESG funds and we are seeing a major shift in the definition of “responsible investment” itself. In the past “ethical” and “ESG” investment may simply be negatively screening for arms, tobacco or pornography companies. Now, investors are actively seeking companies who are making a positive impact in the world, as well as taking into consideration aspects such as their approach to labour rights, environmental issues and corporate governance.
Firms such as OpenInvest and Future Renewables Eco, are examples of firms who have responded to this demand, launching propositions focused on sustainable investment. The DC friendly L&G Future World Fund is also a positive example. Based on three principles – to grow investors’ money over time, to respond to climate change risk, and to influence positive change – the fund looks to actively engage with and challenge companies it invests in to demonstrate their commitment to a low-carbon world. Those who fail to demonstrate this may be excluded from the fund.
Pensions schemes need to think about members beliefs and principles carefully in light of ESG and adapt the DC investment strategy to take account of these principles to make sure these are fully aligned. This should be implemented in the default investment strategy, to allow the majority of members to benefit from it.
According to research from McKinsey & Company, 21.6% of assets under management in the US are now in sustainable investments. Across Europe this is even higher at 52.6% . However, the UK has been far slower in embracing sustainable investments than its Continental counterparts. One of the reasons for this slow pickup is the belief that investing in ESG means giving up performance.
Not only has research shown this not to be correct, but applying ESG criteria to investments can also be a great way to manage investment risk and volatility.
Both HSBC DC pension fund and NEST have embraced ESG in their default investment strategies. They invest in companies that focus on building long term renewable energy solutions. At the same time, they reduce both investment and engagement with companies that have a poor road map to deal with a transition to a low carbon world. Integrating ESG into pension fund investing is not only helpful to society, it also acts as a way of managing the risks inherent in long term investing.
As auto-enrolment kicks in and pots grow even more, this is going to become more vital. The Pensions Regulator (TPR) continues to strengthen its guidance around ESG and there are a number of industry-led initiatives, such as ShareAction and Good Money Week, which aim to promote best practice. These are all positive steps towards putting ESG centre stage and encouraging wider engagement across DC schemes as they aim to better align their investment approaches within the default strategies and encourage members to get more involved.
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