Taking an active approach to sustainability
There is little doubt that sustainable investing is here to stay and will likely become even more important to DC members in the decades ahead.
For example, DCIF’s flagship 2018 research highlighted that “responsible investment has the potential to have a powerful positive impact on how people feel about their pensions” and that “the impact on trust and engagement is likely to be highest for the younger members.”
Good news there; however, in 2019, the Pensions Policy Institute found that “a lack of accessibility, trustee understanding and behavioural factors are barriers to ESG integration.“
Could an active approach, with ESG integrated into the investment process, help DC savers and trustees to overcome these knowledge and implementation barriers?
Robust research has always been essential to active managers. Knowing a company’s business is essential to understanding its sustainability over the long term. The longer timeframe of a typical DC member aligns well with this aspect of active management and sustainable investing.
Our approach as an active manager has been to integrate ESG factors into our investment process, with a focus on financial materiality. We are convinced that sustainable investing through ESG integration, proxy voting and engagement improves our ability to identify those investment opportunities that we believe offer sustainable, long-term competitive advantages.
Why does this matter? In our view, active managers can better look into businesses and industry operations, as well as management. They can use all the available information, including non-financial information, to determine what will have a material impact on those businesses. If you do not know the business well enough, you cannot tell the difference between one that is sustainable and one that is not.
To help DC decision-makers choose between the range of implementation routes, here are a few questions we believe are key to ask of asset managers:
– How do you approach sustainability? Is it part of your investment process or is it a separate product?
– How do you determine whether an issue is material or not?
– Do you exclude any companies or industries based on sustainability concerns?
– Which members of your investment team have responsibility for looking at ESG factors?
– Do you engage with companies to understand how they view ESG risks and opportunities?
– Do you vote proxies in-house or outsource proxy voting responsibility?
Looking at the bigger picture and the transition toward a more sustainable society, active managers can be part of the transition mechanism between capital markets and the real economy by helping to deploy capital with sustainability in mind. Thinking about the value chain of consumers, companies, asset owners, governments, etc., we believe active managers have an important role to play as stewards of capital. And they are an important catalyst for the adoption of sustainability in a number of areas, including education, disclosure, stewardship and collaboration.
Could they also be a catalyst to help DC savers invest more sustainably?
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 DC Investment Forum, Navigating ESG: A Practical Guide, April 2018
 Pensions Policy Institute, The DC Future Book 2019 Edition, September 2019 https://www.pensionspolicyinstitute.org.uk/media/3270/20190919-the-dc-future-book-2019.pdf