Pension funds should do more to incorporate environmental, social and governance considerations into their investment decisions, a report by the House of Commons’ International Development Committee last week suggested.
The report's findings came after evidence submitted to the IDC by Aviva Investors suggested private investment would be key to funding the UK’s implementation of the United Nations Sustainable Development Goals.
The 17 SDGs, or Global Goals as they are commonly known, were introduced at the UN Sustainable Development Summit last year, and cover themes ranging from ending world poverty to promoting sustainable energy sources.
Aviva Investors has previously called on the OECD to clearly define fiduciary duty, and for investors to be benchmarked according to an ISO sustainability standard.
There’s a very long tail of pension funds that aren’t... able to demonstrate to their ultimate beneficiaries that they are taking responsible investment into account in any meaningful sense
Abigail Herron, Aviva Investors
Last week’s report said Aviva’s evidence highlights a need for “mobilising pension funds by providing clarity that pension funds’ fiduciary duty can and should include consideration of environmental, social or governance factors when making investment decisions.”
It recommends that various government departments should enter into discussions with the London Stock Exchange and the City of London, “to discuss how they might work together to create better incentives for sustainable development in the capital markets”.
ESG provides returns opportunity
Aled Jones, head of EMEA responsible investment at Mercer, said trustees could exploit the overlap between ESG concerns and their fiduciary duty to provide returns on investment.
“There’s definitely a growing range of investment opportunities that could be linked to [ESG considerations],” he said. “If there’s a material aspect to it then why shouldn’t you consider them?”
Investing directly into the world’s poorest economies still carries a level of geopolitical risk which may not suit pension schemes’ appetite.
But Jones said the initial capital and shielding from losses provided by organisations like the International Finance Corporation or the Department for International Development could persuade institutional investors to expand their ESG-themed investments into these markets.
Renewable energy infrastructure was highlighted as an area of particular interest for investors by some in the industry, providing competitive long-term returns in the current climate of low gilt yields.
Ian Simm, chief executive of Impax Asset Management Group, said: “Meeting the target levels of returns is more difficult for pension funds now than it was half a decade or a decade ago, and so they are increasingly drawn towards looking at alternatives.”
Schemes reluctant to change
Abigail Herron, head of responsible investment engagement at Aviva Investors, said a handful of schemes had embraced responsible investment, with one client asking her to “help [them] ensure that ‘we’ve got a future that we actually want to retire into’”.
But she said the majority of funds, and more importantly their advisers, remain reluctant to consider sustainability criteria.
“There’s a very long tail of pension funds that aren’t doing anything on this, and aren’t transparent and aren’t able to demonstrate to their ultimate beneficiaries that they are taking responsible investment into account in any meaningful sense,” she said.
A sustained decrease in gilt yields and a difficult round of funding negotiations has seen ESG considerations fall further down the agenda for schemes, whose primary concern is the provision of members’ benefits.
Jonathan Reynolds, client director at Capital Cranfield Trustees, said a lack of bespoke advice and a ‘flavour of the month’ approach from advisers can mean schemes are less receptive to the potential benefits of responsible strategies.
He pointed out that an increased compliance burden might put schemes off targeting emerging markets as part of their sustainability considerations.
“I have to be careful about doing things which on the one hand might give us an investment advantage but on the other hand... will increase our governance costs,” he said. “That’s a difficult call in tough times.”
