LifeSight is a scheme leading the way when it comes to ESG. Maggie Williams speaks to David Bird to find out more

Willis Towers Watson’s mastertrust, Lifesight, launched in 2015 and now supports over 50,000 members in the UK. It has more than £2bn assets under management.

By the end of 2018, the scheme will be allocating more than half of its default fund equities into a new Environmental Social and Governance (ESG) strategy.

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“In many beta strategies, the price of a share takes into account its current valuation, but doesn’t look at the long term,” says David Bird, director, Lifesight. “We wanted to address sustainability and better governance over time, within a framework that is cost-effective for our members.

“To do this, we needed to be able to track an index, but couldn’t find an existing option that suited our needs. Our investment team went to the market and worked with MSCI to create the Adaptive Capped ESG Universal Index.”

The new index includes both developed and emerging market investments, and Lifesight is working with LGIM as a carrier.

In addition to the MSCI index, Willis Towers Watson has also adopted Robeco’s Global Sustainable Multi-Factor Equities Index. This is an active strategy that looks at the ESG attributes of individual stocks. It uses factors such as valuation, quality and momentum.

”We couldn’t find an existing option that suited our needs, so we worked with MSCI to create the Adaptive Capped ESG Universal Index”

“Our approach is not just about ESG,” says Bird. “It’s about building a more sustainable approach for members, how we get better results for them over the long term, and ultimately how we create better outcomes.”

Lifesight’s trustees will compare the default fund’s performance post-tilt to the whole of the market, net of fees, in order to measure performance. “We aren’t changing our own benchmarks because of the new approach, and we still want to beat them,” adds Bird.

Overall, 56% of Lifesight’s equity allocation in the default will have an ESG overlay, divided between the two funds. As members get closer to retirement, they are moved into a diversified growth fund, which will contain 32% of its equity allocation in the same funds.

Bird expects those allocations to remain consistent over time and further contributions to the default will be invested in the same proportions.

Lifesight’s total current allocation to the ESG funds is £740m.

The equity elements of the default that do not have an ESG overlay are “straight beta,” says Bird. “That gives us a balance and also helps us to manage cost.”

Prior to introducing the new funds, Bird says that the allocation now taken up by the ESG funds had been invested in smart beta. “We didn’t move from a straight market cap directly to our new ESG approach. We had an existing smart beta strategy and have now added in more factors.”

“We aren’t changing our own benchmarks because of the new approach, and we still want to beat them”

The process of creating indices, working with providers and negotiating terms means that the new approach has taken time to put in place. “This has been on our agenda for a while,” says Bird.

“The execution has required time, and we had to negotiate hard on fees. While we wanted a sophisticated approach, it was also essential to manage costs for members as they are ultimately paying for this.”

Bird concedes that at present, there is insufficient feedback from members to establish whether they endorse the fund’s move to a more sustainable approach. “I would like to think that there would be impetus from members, but at present there isn’t enough engagement to know.”

While Bird believes the new strategy puts Lifesight ahead of most other master trusts when it comes to ESG, he is clear that the main objective behind the move is delivering returns.

“At present, the ESG approach won’t necessarily be seen as a key reason to use Lifesight. We are very focused on delivery at the moment, but when the fund starts to yield results, then it will become a differentiator,” he says.