The pensions industry has been quick to adopt Environmental, Social and Governance (ESG) principles and risk management, which is only natural given the alignment of long-term objectives. However, with sustainability and ESG data sorely in need of development, most early adopters focused on one of the most reported figures, carbon emissions!
There are two key issues with allowing a portfolio to be driven by carbon emissions:
- It penalises more carbon intense sectors, introducing diversification risks
- It penalises companies going through change to become more sustainable
To engage and utilise sustainability and ESG data appropriately, it needs to be viewed through a lens that gives it financial credibility, i.e., long-term incremental value creation. Without this financial grounding, we run the risk of the proliferation of ESG and sustainability products causing a loss of trust and engagement on sustainability principles.
The power of putting the member objective at the heart of the FutureWise strategy
In 2023, we transitioned FutureWise, from Lifestyle to Target Date Funds (TDF) strategy, for over £7.5 billion and 224 schemes. All defaulting members are now in our FutureWise TDF strategy, which centres the strategy around the member objective of maximising retirement pots.
The TDF structure gives us full flexibility to navigate changing market conditions, innovate the investment strategy without member disruption and provide a simplified investment experience.
Markets, investment strategy and sustainability are rapidly evolving and the TDF structure reflects this evolution and builds on our ability to be dynamic and provide members with cutting-edge sustainable investment solutions.
Through our dynamic de-risking approach to retirement, we can improve member outcomes up to 10.5% at retirement by bringing intelligence and market risk awareness to the de-risking process.
Why maintaining investment rigour is vital to making sustainability a success and ultimately protecting our future
If the financial principles of sustainability are rooted in capturing incremental value creation, rather than a primary objective itself, then passive or index-based approaches that rely on public backward-looking data will continue to struggle to create value using sustainability. The future value created through sustainability, is by its very nature aligned to the approach of active managers that already look to identify future value, risk and profitability.
FutureWise like many defaults has committed to net zero by 2050, and does have a carbon footprint objective. However, unlike many others, we are focused on achieving this carbon objective without introducing diversification risks or letting backward-looking public data drive the portfolio. Instead, across the entirety of FutureWise, our portfolios operate within a progressively reducing carbon budget that is in alignment with the 1.5-degree temperature target of the Paris Climate Accord, but without allowing carbon to directly drive the portfolio.
Fidelity, as an active manager and owner, captures this sustainability outlook through our regular global engagement with companies and enables efficient access to this value driver through a tilted ESG approach across FutureWise.
Our proprietary ESG ratings relative to peers across many sectors, also avoid the introduction of sector diversification risks through the ESG ratings approach portfolios can maintain sector alignment with consumer demand, albeit accessing the most sustainable companies within each sector.
The success of FutureWise
In 2023, over the calendar year, FutureWise delivered returns of 15.7% for a younger member and 11.3% for members at retirement, gross of fees, which was top quartile for younger members and market leading for retiring members relative to peer default strategies. We believe that providing transparency and a strong governance structure to our clients helps build trust and confidence in the FutureWise strategy.
FutureWise has also delivered market leading net zero progress by reducing its carbon footprint by 61.4% since our first TCFD report in 2020 to 38.5 tCO2e / £1m invested, critically without introducing sectoral bias.
There can be no better compliment from our clients than the growth FutureWise has seen, with over £11 billion in assets under management today and with a further £5.5 billion committed through 2024. In turn, this growth has enabled us to reduce expenses on the strategy by between 1 and 2 basis points for all FutureWise investors pre-retirement.
As this growth has accelerated, so too has our innovation towards further diversification and the consideration of new opportunities to enhance member outcomes such as Private Assets.