Mark Foster, Global Head of Pensions Solutions, Aberdeen Standard Investments
DC and ESG – a dynamic duo for DC defaults?
The DC pensions landscape is undergoing significant change right now, and one of the most important drivers behind this transformation is the rise of ESG investing.
At Aberdeen Standard Investments (ASI), we believe Environmental, Social and Governance factors can influence investment performance and help DC schemes deliver better member outcomes.
The rise of ESG
When it comes to the growing prominence of ESG in the DC market, there are two forces at work. Firstly, demand for sustainable and responsible investments has exploded in the past few years. Secondly, DC schemes face greater policy and regulatory pressures to consider ESG factors in their portfolios.
Embracing ESG in your DC scheme
Trustees also need to be aware of the material financial impact ESG factors can have on their investments.
At Aberdeen Standard Investments (ASI), we have long understood that well-governed companies that look after the ESG aspects of their operations tend to perform better than those that don’t. Consequently, we use ESG criteria to identify potential risks and opportunities that could affect the performance of a company and its valuation.
Asset managers have a critical role to play in helping DC schemes adopt and potentially benefit from an ESG approach. They can assist trustees by integrating ESG into the investment process and into strategic asset allocation, as well as by providing ESG in DC offerings.
At ASI, we embed ESG considerations into our investment processes. Our teams integrate ESG into their research and engage with companies about how they’re managing ESG risks within their business. We also work with clients to exclude companies that fail to meet minimum ESG-related standards, and ESG is part of our decision-making process in portfolio construction.
Another way to incorporate ESG factors is within a scheme’s strategic asset allocation (SAA).
Many ESG risks have systematic implications at asset-class, market and sector levels and fit into wide, global themes. Most are also structurally long-term in nature, so are a natural fit for SAA.
For example, both carbon footprint and climate scenario analysis are powerful tools that we can integrate in our SAA process.
ESG offerings for DC schemes
Previously, one of the hurdles to DC schemes adopting ESG principles was the availability of suitable products, but there’s now more choice than ever.
For some schemes, the fact that an asset manager integrates ESG factors in its investment process as standard and across all funds will be enough. For those that want to go beyond that, managers such as ASI have a range of solutions across the ESG spectrum to meet these diverse needs.
We can offer exposure to themes – carbon mitigation, for example. We also have options that target specific ethical, social or environmental goals, as well as impact investing funds that use the UN’s Sustainable Development Goals as a framework.
More recent additions to our ESG suite are our sustainable index strategies. These are a range of equity index funds that aim to track sustainable and responsible investment indices designed by ASI in conjunction with MSCI.
Final thoughts …
We believe ESG factors are among the most important drivers of long-term returns, and default DC schemes need to take these into account. At the same time, investment returns, value, governance and the views of their members also remain in focus.
Thankfully, trustees have more options than ever to strike the right balance. They can integrate ESG into their schemes in a variety of ways, while aiming to improve member outcomes – ultimately, investing today for a better tomorrow for all.
Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested.
United Kingdom (UK): Aberdeen Asset Managers Limited, registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, AB10 1XL. Standard Life Investments Limited registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Both companies are authorised and regulated in the UK by the Financial Conduct Authority.