PLSA & Sustainalytics publish report examining ESG risk in default funds

The Pensions and Lifetime Savings Association (PLSA) has today (Tuesday) released its newly commissioned study into the environmental, social and governance (ESG) risks facing members of default funds offered by defined contribution (DC) pension schemes in the UK.

The number of savers enrolled in DC workplace schemes in the UK is expected to rise to 17 million¹ (up from 11 million today) with an expected aggregate pension pot of £554bn (potentially as high as £914bn) by 2030²; and currently 90 per cent of DC savers are in their scheme’s default fund³. At the same time, ESG investing has gained significant momentum in the UK, with £1.4tn in assets under management in the wider investment community in 2015 versus £500bn in 2013⁴. The combination of these two factors underscores the importance of managing ESG risk in default fund arrangements.  

The research by Sustainalytics, a leading global provider of ESG and corporate governance research and ratings, assessed the equities allocation for a typical DC default fund, and mapped this against the most prominent ESG risks. Key findings include:

• ‘human capital’ is the single biggest source of ESG risk at the companies in which DC default funds invest, accounting for 11 per cent of the ESG risk to which default funds are exposed.
• climate change risks from energy use and greenhouse gas emissions are also substantial, affecting 22 industries found in a typical DC default fund’s portfolio, more than any other ESG issue.

Luke Hildyard, Policy Lead: Stewardship and Corporate Governance, Pensions and Lifetime Savings Association, said:

“Pension funds are moving beyond the debate about whether or not the environmental and social impact of their investments matters to long-term returns and on to what they should do to manage it.

“The PLSA commissioned this research to better understand the scale and type of risk facing DC pension savers. The findings demonstrate the importance of stewardship activities around issues including human capital, business ethics, data security and climate change. Over the coming year we will be developing further resources to help our members engage with asset managers and investee companies around these issues.”

Report author Doug Morrow, Associate Director, Thematic Research, Sustainalytics, commented:

“Given the convergence of UK market trends, understanding and managing ESG risks in DC default funds is becoming increasingly important. Our research findings reveal pension schemes can potentially mitigate these risks by embedding ESG investment products in default fund allocations and engaging on ESG issues with external managers and investee companies. We applaud the PLSA for raising awareness of this critical topic and believe these findings will help to advance the dialogue around ESG issues and default funds.”

-ENDS-

[1] Silcock, D., et al. (2015), The Future Book: unravelling workplace pensions, Pension Policy Institute

[2] Silcock, D., et al. (2015), The Future Book: unravelling workplace pensions, Pension Policy Institute

[3] PLSA, (2016), Annual Survey 2015

[4] Trends Report Eurosif, (2016), European SRI Study 2016

A full copy of the report can be found here.

NOTES TO EDITORS:

ABOUT THE PLSA

We’re the Pensions and Lifetime Savings Association; the national association with a ninety year history of helping pension professionals run better pension schemes. Our members include over 1,300 pension schemes with 20 million members and £1 trillion in assets, and over 400 businesses. They make us the voice for pensions and lifetime savings in Westminster, Whitehall and Brussels.

Our purpose is simple: to help everyone to achieve a better income in retirement. We work to get more money into retirement savings, to get more value out of those savings and to build the confidence and understanding of savers.

ABOUT SUSTAINALYTICS

Sustainalytics is an independent ESG and corporate governance research, ratings and analysis firm supporting investors around the world with the development and implementation of responsible investment strategies. With 13 offices globally, Sustainalytics partners with institutional investors who integrate environmental, social and governance information and assessments into their investment processes. Today, the firm has more than 300 staff members, including 170 analysts with varied multidisciplinary expertise of more than 40 sectors. Through the IRRI Survey, investors selected Sustainalytics as the best responsible investment research firm, 2012 through 2014, and the company was named among the top three firms for ESG and Corporate Governance Research in 2015 and 2016.  

For more information, visit www.sustainalytics.com. 

PLSA PRESS CONTACTS:

Lucy Grubb, Head of Media and PR, Pensions and Lifetime Savings Association
T: 020 7601 1726, M: 07713 073 023, E: [email protected]

Babak Mayamey, Press Officer, Pensions and Lifetime Savings Association
T: 020 7601 1718, M: 07825 171 446, E: [email protected]

Kathryn Mortimer, Press Officer, Pensions and Lifetime Savings Association
T: 020 7601 1748, M: 07901 007 713, E: [email protected]