Kim Crabtree, Associate Director, Relationship Management, MFS Investment Management
In today’s culture, one thing that is unlikely to face cancellation is the push for more sustainable investing. Indeed, with more focus on sustainability globally, this has become an increasingly important topic for DC schemes and members.
However, the availability of sustainable investments and methods of implementation vary significantly by country, as we discovered in our (see endnotes for more detail).
Why is it important?
While regulations have historically been a key driving force, members are increasingly showing they care about how their money is invested. Despite varying regulations around the world, one voice that is consistently supportive of sustainable investing is that of the member. Our survey results show that members are interested in incorporating sustainable investments into their DC schemes, with approximately half of members across the countries surveyed indicating they believe retirement investments can be used to address sustainability issues. UK and Canadian respondents showed the highest interest (see Exhibit 1).
Source: Dynata. Q: What do you think is the best way to address sustainability (ESG) issues through your retirement investments? (See endnotes for more detail.)
Is sustainability compatible with superior investment returns?
Ultimately, we believe sustainable investing is an important component of long-term active management, which in turn aligns with the long-term goals of investing for retirement. There is a common misconception that a member cannot enjoy superior returns while at the same time investing in funds that consider ESG factors.
We do not view sustainable investing as a binary proposition. Instead, we believe that an integrated approach to sustainable investing, rooted in materiality, can potentially deliver on both returns and sustainability.
How to implement sustainability in DC?
Generally, there are two possible paths for schemes to incorporate sustainable investments: 1) the addition of ESG-themed funds to the investment options or 2) a broader approach to integration in which ESG-related factors are considered during the fund selection and scheme design.
Many DC schemes in the UK have already incorporated sustainable investments into the default option or are considering doing so, often through passive funds that track an ESG index. With the significant growth in these types of funds, it becomes ever more important for trustees to ensure they are meeting the scheme’s objectives while at the same time ensuring effective engagement and stewardship for their members.
To help make the right choice, we encourage schemes to consider the following steps when thinking about including ESG-related investment options.
|Discuss the key points on ESG incorporation with the investment committee||Talk about the suitability of different approaches to responsible investing, the importance of engagement and stewardship, and what questions the investment committee is getting from members; identify questions related to implementation|
|Work with service providers to implement||Incorporate ESG principles into the RFP/due diligence process and into reporting requirements and investment options availability|
|Educate members||Tell members about the chosen approach and educate them on it|
We believe that an integrated approach to sustainability is consistent with a trustee’s fiduciary responsibility and can potentially foster stronger member engagement. In turn, this can help to create the desired alignment of member beliefs with their investments.
To find out more about MFS’s integrated approach to sustainable investing, please visit MFS.com/sustainability.
This blog is taken from the first paper in a 3-part series. The series challenges common DC misconceptions and helps trustees and corporate advisors weigh the pros and cons of active management by referencing fiduciary principles and market and member survey data.
For institutional and investment professional use only. Issued by MFS International (U.K.) Limited (“MIL UK”), a private limited company registered in England and Wales with the company number 03062718, and authorised and regulated in the conduct of investment business by the UK Financial Conduct Authority. MIL UK, an indirect subsidiary of MFS®, has its registered office at One Carter Lane, London, EC4V 5ER and provides products and investment services to institutional investors globally.
Dynata, an independent third-party research provider, conducted a study among Defined Contribution (DC) scheme members in the US, UK, Canada and Australia on behalf of MFS. MFS was not identified as the sponsor of the study. To qualify, UK members must be actively contributing to a Defined Contribution Scheme, Master Trust or Individual Savings Account. The survey was fielded March 31 to April 13, 2020. There were 1,005 US respondents, 1,000 Canadian respondents, 1,014 UK respondents and 1,007 Australian respondents.