Consultants welcome providers’ and schemes’ pledges to target 50 per cent reductions in the carbon intensity of their investments by 2030, but are divided as to whether they will hit these targets, according to new research into adviser attitudes from Corporate Adviser Intelligence and the DC Investment Forum (DCIF).
Investment consultants think quality of carbon disclosure data for asset classes such as bonds, property and private equity is so poor that it risks making 2030 targets meaningless and believe greenwashing is a serious problem in the investment and pensions arena. But they are optimistic that the financial disclosures regime and the green taxonomy will help address this.
The research, conducted through in-depth interviews with sustainability experts at 9 major investment consultancies and qualitative research with over 50 DC pension consultants, highlighted concern at the rapid growth of different ESG and sustainability accreditation bodies, the stringency of which is difficult to assess.
Sustainable investment consultants do not think the implementation of net-zero targets sits at odds with trustees’ fiduciary duty to maximise returns. They also say schemes have not missed out on returns resulting from the recent surge in energy prices as schemes have not divested from fossil fuels yet. In fact the Russia/Ukraine conflict may have the effect of speeding up nations’ decarbonisation programmes, say consultants, as they look to secure their energy supply through renewables.
Sustainable investment consultants do not think the implementation of net-zero targets sits at odds with trustees’ fiduciary duty to maximise returns. They also say schemes have not missed out on returns resulting from the recent surge in energy prices, in part because schemes have not divested from fossil fuels yet. Consultants added that DC schemes’ investment strategies remain focused on longer-term net-zero objectives rather than shorter-term market movements.
However, generalist DC consultants are more sceptical, with a quarter of generalist DC consultants concerned that net-zero targets negatively impacting returns. Asked whether they think a scheme which achieves its 50% net zero decarbonisation target by 2030 will deliver lower returns than a scheme not hitting that target, 26 per cent said they thought returns would be sacrificed, compared to 74 per cent that did not. But there was less scepticism around hitting 2050 targets for full net zero, with just 15 per cent of advisers believing returns would be lower.
Consultants disagree as to whether ‘tilts’ or ‘engagement’ will dominate as the principle strategy to achieve a transition to net zero over the next 10 years.
The research also asked consultants how they like their role to be defined. They prefer the word ‘sustainability’ to ‘ESG’ or ‘responsible investment’ to describe what they do, as it reflects both sustainability of returns and supporting sustainability across society.
Membership of cross-industry ESG/sustainability bodies is considered a hallmark of a good net-zero consultant, but is only a starting point, say advisers.
The research uncovered a divide in opinion amongst consultants over the value of member voting apps divide opinion amongst consultants – some think they boost engagement, others think they mislead members as to what they are achieving.
Consultants are also divided over the question of whether carbon offsetting can support a transition to a net-zero world. Some think it plays a role, others think it is better than doing nothing, while a third group think it has no impact at all.
Consultants also thing impact investing has strong potential for the DC sector but its take-up will be limited by a shortage of opportunities for investors, and trustees and sponsors are increasingly asking to go beyond climate change and committing to a wider range of real-world challenges through impact investments.
Louise Farrand, executive director, DC Investment Forum says: “Investment consultants have a massive role to play in moving schemes to a more sustainable, lower carbon future. So it is important to understand what they are thinking and how they are approaching the huge challenges faced by schemes.Investment managers and trustees’ roles in the transition to a more sustainable world have been closely scrutinized. But less attention has been paid to one pivotal player in the journey: investment consultants, the trusted advisers and gatekeepers to the UK’s fast-growing pool of DC assets.”
John Greenwood, editor, Corporate Adviser says: “The pensions industry has some way to go before it can genuinely say it is investing its assets in a way that is fully aligned with the beliefs and values of the people it represents. But big positive changes are definitely being made.
“Key to the transformation of the portfolios of schemes across the pensions industry to a more sustainable, lower carbon approach is the role of the investment consultant. This research looks at the attitudes, beliefs, fears andchallenges of those investment consultants overseeing the assets of tens of millions of DC pension scheme savers.
“As the financial services sector continues on its journey towards decarbonisation, the findings of this report – collated from off-the-record conversations with key industry players and anonymised polling of generalist DC advisers – make interesting reading, and should serve as food for thought for policymakers and regulators.
“Given the scale of the task in hand – repositioning the entire global economy to a more sustainable, low carbon way of operating – it is not surprising that investment consultants have concerns in some areas and are cynical as to some of the claims being made. But the overall impression is of an advisory community engaged with asset managers, trustees, scheme sponsors and regulators in a serious, positive drive to transform the pension funds they oversee and support the wider economy on its own transition.”
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