The democratisation of investment through shareholder activism runs the risk of raising obstacles for professionals structuring optimal portfolios for members, advisers have warned.
Speaking at a Corporate Adviser round table on ESG in DC pensions, Amanda Latham, associate and policy & strategy lead at Barnett Waddingham warned of the complexities raised by presenting members with seemingly binary questions on responsible investment issues.
Latham said: “If we democratise investment and we ask people ‘how would you like things invested’ then we’re taking away the sort of professional analysis of risk-return and impact that that needs to be brought to the table.
“A vote to end any investment in animal testing, for example, from a practical perspective may not be entirely possible at all because there are requirements in many jurisdictions for animal testing for products to be brought to market. If we were to ask the members and they said no animal testing, that removes pretty much the entire investable universe, and this is going to create a very difficult position [for trustees and investment managers].”
People prefer to “put money in and get something out,” according to Latham, rather than spend time understanding these complex issues.
Veronica Humble, head of DC investments at LGIM agreed and emphasised that democratisation of investment in pensions needed to be a long-term process, otherwise it could destabilise the entire ESG project.
She added: “There is a real drive to democratise things, but also to delegate voting.” She pointed to high profile issues such as the war on plastic and animal testing as examples of investments that are emotive but not easy to eradicate. “Our hospitals are basically built with plastics and there is no way to completely get rid of that. If we start concentrating on things that are less material but are potentially hazardous to society, we can derail the whole thing.”
The round table was held to debate the findings of the Corporate Adviser ESG in DC Pensions Report 2022, which analysed the ESG strategies of 21 providers’ defaults. To illustrate the complex borderline between ESG and ethical considerations, just over half of the schemes analysed exclude tobacco from their investments. But most said they did so on purely investment grounds – that the future prospects for tobacco were poor – rather than because they screened the asset class to reflect an ethical position of the membership of the scheme.
Fiduciary definition
Nigel Dunn, partner at Lane Clark & Peacock highlighted that there is a real-world impact to investment decision- making as well as a purely financial outcome, and that this needed to be reflected in the interpretation of what a trustee’s fiduciary duty towards members actually is.
He said: “There are examples of leaders within the pensions industry that are frustratingly stubborn to embrace change. One of the areas [where this is evident] has to be around maximising returns. We’ve got quite an archaic interpretation of fiduciary duty in the pensions industry. It doesn’t mean returns only. Planetary considerations can have a financial impact.”
Understanding stewardship
Stewart said that engagement and stewardship haven’t historically delivered the outcomes the industry needed. He added that something fundamental has to change. According to Stewart, there is a lack of understanding and appreciation for how stewardship can work effectively.
He said: “Some of the asset managers that historically do not vote for progressive policies or actions in relation to dealing with climate change are not being held to account. That’s gradually changing, and the DWP is already thinking about how to strengthen powers for asset owners to try and solve that. But I think we as consultants have a duty to drive that as well.”
Engaging activities
Ultimately, members care about where and how their money is invested and Steve Herbert, head of benefits strategy at Howden Employee Benefits believes that focusing on ‘positive actions’ as a result of their investment can improve engagement.
Herbert said: “Investing in climate- related solutions is an interesting area. Within that, you’ve got private equity and infrastructure. From a returns perspective and a risk diversification perspective that can be quite interesting, as well from an engagement perspective. We then finally have the opportunity to communicate with members, not about ESG sustainability, but with a specific positive action that’s happened on the back of how their money has been used, which can be potentially more engaging.”
Herbert added that from a communication perspective, there was more potential to engage with members on factors other than net zero and the decarbonisation of portfolios.
He said: “ESG stands for more than just environmental. I know that the entire industry has got itself completely wrapped up in the net-zero thing, and I know that is the most important element. But what about the social side? What about the corporate governance side? Why aren’t we talking about that more? I think those things will actually land and make the whole subject more digestible to the general population and employers than just talking about net zero.”
He added that while net zero is the biggest issue for a small number of individuals, there are many employers and scheme members for whom it is quite a way down their list of priorities.
Herbert said: “How far is net zero embedded in corporate clients’ agendas? Not a lot is the honest answer. It’s got a long way to go so it doesn’t matter how much we keep talking about this as being a done deal. We have net-zero commitments, which is great and we need to be there. What we haven’t yet got are lots of smaller clients actually understanding what we’re doing and why we’re doing it and until we get to that point a lot of this is vapour.”
Impact opportunity.
Anastasia Guha, global head of sustainability at Redington, added that impact investment, an emerging area for DC at present, would grow in significance as understanding of how it differs from traditional ESG develops.
Guha said: “Impact is an emerging area. Comfort levels around what it means and how it differentiates from ESG will build over time. I do see it as part of the overall conversation around investing sustainably, but it’s not the same as your traditional ESG investment solutions today. In fact, it’s explicitly not those things.”
