There is still work to do to embed sustainable investing principles into trustees’ thinking. Here are ten crucial considerations for DC trustees and their advisers from JLT’s Maria Nazarova-Doyle
1) BUILD UNDERSTANDING:
Some schemes still have an outdated perception about environmental social and governance (ESG) investing.
It is not the same as negative screening of unethical sectors, nor is it a feel-good strategy that risks losing money. In fact, not taking it into account will hinder investment performance.
2) ASK FOR CLARITY:
There is a real need to focus on education and trustee training around sustainable investment.
3) DEFAULT FUNDS NEEDS SUSTAINABLE INVESTMENT:
Default funds are long-term investments. Trustees cannot take unrewarded risks as there is no-one to make up any shortfalls except the members themselves.
That means they can’t overlook ESG any more – just look at companies such as Volkswagen.
4) DON’T BOX-TICK:
There is a temptation for trustees to think that by offering an ethical fund choice in a self-select range they have ‘done’ sustainable investment.
Sustainable investment needs to become an essential part of the default design as well.
5) EXPECT MORE REGULATION:
In June 2018, the Department for Work & Pensions published a consultation – Pension trustees: clarifying and strengthening investment duties.
This would require trustees to rewrite their statement of investment principles to show how they take ESG into account in their investment strategy. The government is saying ‘you can’t overlook this any more’.
6) LOOK AT BEST PRACTICE IN OTHER SCHEMES:
There are some high-profile DC schemes that have already incorporated ESG factors in their default funds. One is HSBC, which introduced a climate-change tilted equity default option in 2016.
As soon as there begins to be a critical mass of schemes doing this, others will need to keep pace.
7) TAKE NOTE OF NEST:
The government-supported pension scheme NEST has also introduced a climate-change fund into its default arrangement.
NEST is listed as the top auto-enrolment provider in responsible investment watchdog ShareAction’s recent report, The Engagement Deficit.
ShareAction scored the 10 biggest UK DC schemes according to their investment approach.
8) USE ESG TO ENGAGE YOUNGER – AND OLDER – MEMBERS:
A number of studies and anecdotal evidence has shown that younger savers are more interested in sustainable investment. But I haven’t yet seen that into engagement with pension schemes.
An overwhelming proportion of people are in their scheme’s default fund – the proportion is hardly ever below 90% – so almost no one is engaging with their pension. Can ESG make that connection?
9) ENCOURAGE MORE TRUSTEE BOARD DIVERSITY:
There’s been a lot of pressure around diversity on executive boards. One example is the 30% Club, which has campaigned for a minimum of 30% of women on FTSE 100 boards.
But that hasn’t been repeated on trustee boards or independent governance committees (IGCs).
With IGCs, there is no background of re-election, no male-dominated workforce, no established way of running a board that is hard to change. And yet we have still failed to create diverse boards.
Younger trustees will help to engage younger generations because they will understand them better.
10) UNDERSTAND YOUR MEMBERSHIP:
In a dream world, you would create a default for each individual. But that’s not possible, so trustees need to find out shared characteristics in the membership and work with those.
Then, schemes need a good self-select range so that those who don’t fit the profile of a standard member can choose options that suit them better.
To download the full research report click here.
Maria Nazarova-Doyle is head of DC investment consulting at JLT Employee Benefits
This research was carried out in association with Newton Investment Management