There is little evidence that ESG-badged pension funds are delivering superior returns, although they cost significantly more according to Chris Sier, founder of ClearGlass Analytics and a former chair of the FCA Institutional Disclosure Working Group.
Sier was talking to Corporate Adviser’s Master Trust and GPP conference about making sense of transaction costs. Sier has been a leading campaigner for better cost transparency across the pensions industry in order to help asset owners and trustees compare the value for money of different propositions.
Sier says: “From a quick scan of our database it is clear that funds that are badged sustainable, green, responsible, or future certainly command a premium when it comes to cost, but we have not yet seen that in the return they deliver.”
His comments followed remarks by AllianceBernstein senior vice president and lead portfolio manager of multi-asset solutions EMEA David Hutchins in an earlier session that there were concerns about ‘greenwashing’ in the industry, with the drive towards ESG solutions coming from marketing departments rather than investment analysts. He said it appeared that the difficult decision were being made in the labelling of funds rather than in their underlying investment strategy.
He says that AB adopted a “top down” approach looking at how to mitigate climate change risks across their whole portfolio, not by a 10 per cent allocation.
However Sier’s comments were challenged by Scottish Widows head of pension investments Maria Nazarova-Doyle who pointed out that more recent Morningstar analysis indicated that ESG funds were outperforming those that did not take these wider factors into account.
Sier’s presentation set out some of the challenges facing the DC sector. He said that to date there has been less demand for a comprehensive cost analysis from the DC sector, when compared to DB. “This needs to grow as there is a lot of very good quality data out there.”
Sier gave delegates an overview of the data held by ClearGlass Analytics, from analysing costs and performance of hundreds of schemes. This revealed some surprising trends: while the DC schemes analysed tended to be cheaper that DB equivalents – in terms of total costs— their performance tended to be worse.
Sier’s analysis showed that for single DC scheme the total cost figure is 46 basis points. While for DB schemes (with AUM of £1bn or less) it is between 54bsp and 49bsp with costs declining as schemes grow in size. However once DB scheme exceed £1bn AUM this cost figures rises, often considerably. Sier says this reflects more a sophisticated asset mix and more direct investment strategies rather than pooled options.
However when it came to performance both single DC schemes and those via a platform were bottom quartile. In contrast the higher charging larger DB schemes were top quartile, with smaller DB schemes being either second or third quartile.
Sier pointed out that although there was a push for DC solutions to invest in infrastructure and other illiquid asset classes this would come at a cost. Investing in private equity could he said effectively double costs for some DC schemes, without necessarily boosting returns by the same margin.
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