Two-thirds of schemes to increase allocation to social investments

A survey conducted by Create-Research for asset manager DWS — which queried 140 schemes, including 28 UK-based pension funds, with assets under management worth €21.tn (£1.8tn) — showed that only 2 per cent of respondents are expecting to decrease their allocation to this type of investment.

The remaining 32 per cent are maintaining their current allocation to the ‘S’ pillar of environmental, social and governance investments.

Before the pandemic-led financial crisis, new inflows into these funds were seen by many as merely a momentum trade in a 10-year raging bull market, the DWS report stated.

It was believed that the viability of the three ESG pillars would be best judged not by the inflows when markets are rising, but by their resilience when the inevitable correction comes.

This theory was proved with the market crash of March 2020, which resulted in 82 per cent of ESG indices seeing less drawdown during periods of extreme stress, when compared with their non-ESG parent indices.

According to DWS, 81 per cent of ESG indices have outperformed their non-ESG counterparties since the March sell-off in 2020.

The report also concluded that 62 per cent of schemes expect to use equities as their favourite underlying asset class of choice for social investments over the next three years, rising from the current 53 per cent. 

Furthermore, 67 per cent of respondents said they would select fund managers on the basis of their track record and on the delivery of their clients’ social agenda. 

As reported by Pensions Expert in March, the UK government has called for a greater emphasis on the social element of pension schemes’ ESG strategies, as there is a concern that trustees are ill-equipped to deal with these factors.

In a call for evidence published on March 24 by the Department for Work and Pensions, Guy Opperman, minister for pensions and financial inclusion, said the industry has a good understanding of good governance. However, he is concerned that “social factors are not well understood”.

Sebastian Schiele, head of passive mandates sales Europe and Asia at DWS, believes the conversation between asset managers and schemes “should start with what the investor’s view on the social pillar is”, since “there is not one unique definition”. 

This also greatly varies as to who the investor is, where they are based, and the regulatory regime within which they operate, he explained.

Schiele noted that some DWS clients, however, have a very specific social strategy, with the asset manager being awarded bespoke mandates by these schemes.