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DB Trustees struggling to reflect beliefs on ESG in investment strategies, survey reveals

esg climate green

DB pension schemes are struggling to reflect their own beliefs on ESG investment in their reflection strategies, new research from XPS Pensions Group has found.

Only 40% of defined benefit pension scheme trustees believe that their scheme’s ESG policy reflects their preferred approach to ESG and sustainable investments, research from XPS Pensions Group published today has found.

XPS surveyed over 200 trustees across 80 pension schemes and found that while nearly all (94%) are in agreement at the importance of ESG investment principles, many find it difficult to implement them.

Trustees also believe that it is time for them to be more transparent with members on ESG issues, with 85% agreeing that it is important to communicate their scheme’s responsible investment strategy with members. However, they stopped short of supporting that members’ views should be reflected, with only 46% agreeing that this should be considered when agreeing the investment strategy.

In XPS’s view, to help resolve the gap between intention and action, trustees should focus on:

  • Innovation in fund products to help trustees identify strategies that supports their ESG ambitions
  • Development of a UK specific equivalent of the EU Sustainable Finance Disclosure Regulation to help identify funds that incorporate ESG risk a management and sustainable issues into decision making.
  • Enhanced practices and reporting from fund managers for existing fund products to ensure accountability around effective integration and risk management
  • Regular interaction with advisors who should bring the latest thinking to pension schemes and champion continuing improvement in the asset management industry.

There is a clear desire for change within the industry. Pension schemes could take a more activist stance in their shareholdings in the future, with 83% of trustees saying stewardship plays an important role in how schemes’ assets are managed. This reflects a desire to engage with portfolio companies and could lead to pension schemes representing a powerful voice during AGMs either via their managers or more directly. A further 78% of respondents want to monitor the activity of investment managers beyond minimum compliance checks in order to avoid ‘greenwashing’.

Simeon Willis, Chief Investment Officer at XPS Pensions Group, comments:

“We are in the midst of a significant change of direction in the industry. This survey clearly demonstrates that ESG has rightly gained trustee support and buy in – but there is still a lot of work to do from here. We need clearer terminology, better information and more choice to facilitate investment in sustainable products by schemes.

“Fortunately the asset management industry is bought into this too, and has been for some time. When we polled 90 representatives of UK fund managers at our conference back in 2019, 76% thought that investments should be used as a force for good against climate change.

“But even with this good intent we need to move quickly as time is running out to align pension schemes’ portfolios with the Paris Agreement target of keeping global warming well below 2°C.”

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