The Covid-crisis is likely to accelerate the implementation of ESG investment strategies within DC pensions.
This was one of the main conclusions of a panel debate on this topic Corporate Adviser’s recent Sustainable Pensions summit.
Discussing this issue, Barnett Waddingham partner Mark Futcher said that there has already been a significant shift in consumer attitudes. He says: “Investors now expect firms to ‘do the right thing’ when it comes to managing their money, whether this is in relation to being more climate aware, or looking at supply chain issues.
“Although the term ‘ESG investing’ doesn’t always resonate with investors, the language used is more about right and wrong.” This trend is likely to continue in light of the Covid crisis, he says, which has thrown a spotlight on corporate behaviour.
PTL client director Dan Richards points out that the outperformance of ESG stocks during the recent market falls may also contribute.
“Although this was over a very short timeframe, it is important to evidence the benefits of ESG strategies, as there is still some scepticism out there. However the evidence that well managed companies outperformed by 2 or 3 per cent during this period is certainly compelling.”
But ShareAction’s director of financial sector strategies, Wolfgang Kuhn says the focus should be on the longer term benefits of responsible investment. “One would hope it would make sense to properly price risk in a market economy.”
He argued that it should be a “no brainer” for these ESG risks to be taken into account when making investment decisions, although he conceded there was still a long way to go before ESG analysis becomes ‘business as usual’ within the broader pensions sector.
However all those on the panel agreed that ESG considerations were now a more central concern, and have shifted to the mainstream. The challenge for many in the industry is to balance different perspective on ESG across the supply chain.
Standard Life’s head of unit linked investment solutions Gareth Trainor explains some of the complexities the company faces: “At one end we have the asset managers and at the other end the individual member. We sit in the middle as product providers alongside trustees, master trust providers, EBCs, advisers and other consultants.
“Trustees may have a particular view on the approach they want to take to ESG, and asset managers may have their own policies and approach. At the same time we are being encouraged to ask members to think about how this will impact them. Our challenges as a product provider is to marry these up, whether we are looking at bespoke solutions as well as off-the-shelf options.”
Trainor agrees that it can be challenging to take the views of 10,000 members of a pension scheme and distil this into a set of coherent values. As he points out this can encompass both a Thunberg and Trump view of the world, with all number of different points in between: from those who want to avoid tobacco stocks to other who want to avoid palm oil.
Those on the panel agreed that the design of default DC pension was key to wider adoption of ESG strategies. Trainor pointed out that this also has to cover legacy DC schemes as well as new solutions. “If we want to drive change we have to look at how we transition existing books of business and do so in a way where we take everyone on the journey with us.”
Trainor says there was a need to “look under the bonnet” of many default schemes that were at least 10 years old to ensure that still met the needs of those working today.
Kuhn agreed that it reform of default scheme is likely to have the most impact. “Asset owners need to push assets managers harder, as they have the resources to figure out what needs doing. They will invest the time and energy, if their institutional clients tell them they need to work harder.”
He adds: “ We have 10 years to half emissions, this change isn’t hapepning at the pace it should.”
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