Widows switches into ESG fund as integration becomes standard

The provider, which has 6m customers, has invested £2bn in a new fund managed by BlackRock that tilts towards the winners of the energy transition and reduces exposure to companies that will lose out. 

“ESG factors have a very significant impact on returns,” says Maria Nazarova-Doyle, head of pension investments at Scottish Widows.

“In order to look after clients’ assets, we need to be smarter about investing in companies and not just focus on high-level principles. This marks our first proper investment in the DC default fund towards transition to climate change tilts, and delivers 50 per cent risk reduction compared with the benchmark.”

Rather than just asking schemes to report on what they’re doing and educate their customers, maybe default funds could be asked to meet certain thresholds

Alistair McQueen, Aviva

The pension provider’s initial £2bn investment equates to 10 per cent of the equities allocation in its workplace default and retirement portfolio funds, and then it will decide at a later date whether to invest more in the fund.

BlackRock’s Climate Transition World Equity Fund, which Scottish Widows helped to design, is based on the premise that the transition to a low-carbon economy will not just affect oil and gas companies but other sectors such as hospitality and transportation.

It excludes controversial and nuclear weapons, as well as companies whose revenues from tar sands and thermal coal are more than 5 per cent, while investing in energy production, clean technology, energy management, water management and waste management.

Earlier this year, Scottish Widows launched a responsible investment team, headed up by Ms Nazarova-Doyle, before unveiling a RI framework that underpins investment decisions.

“We’re working a lot closer with managers and looking forward more on issues like climate change to make sure we’re very closely aligned with the goals of the Paris Agreement,” she says. 

The Paris Agreement, signed by countries in 2015, aims to keep global temperature rises within 2C above pre-industrial levels by 2050, and pursue efforts to limit it to 1.5C.

Ms Nazarova-Doyle thinks ESG factors need to be embedded more across pension providers. “Some providers are launching very good ESG products, but they’re just an additional option rather than in the default fund.

“It’s important to take action and invest it better to deliver proper retirement outcomes rather than leave it up to members.”

Lack of standardisation

Providers are approaching ESG in very different ways, which makes it difficult to make comparisons, says Amanda Latham, policy and strategy lead at Barnett Waddingham.

“We’re finding there are quite varied approaches based on our initial research. Some providers say they’ve always done this and it’s in their DNA, while others are launching products specifically tied to ESG,” she says.

“A lot of providers will have had policies in place for a while, but we’re only now really starting to see the actual changes to portfolios,” she adds, explaining that implementation takes time.

But Ms Latham highlights a point about providers only partially implementing ESG into defaults: “It does not really make sense to have 50 per cent of assets that are climate aware and the other 50 per cent aren’t, for example. But eventually we expect providers to move to 100 per cent climate-aware assets.”

In July, Nest unveiled a new climate change policy to decarbonise its default fund portfolio to reach net zero emissions by 2050, and invest in climate solutions and renewable energy.

The master trust aims to halve carbon emissions in its portfolio by 2030 and align with the Paris Agreement goals. All of its developed market equities have been moved into its Climate Aware Fund, which was launched in 2017, and it will do the same with emerging market equities.

Katharina Lindmeier, RI manager at Nest, says: “A few other providers have come up with targets aligned with the Paris Agreement, but not many have yet said that they will commit to aligning the whole fund.

“We don’t know exactly how it’s going to look in all asset classes as some are much harder than others, but we really want to hold ourselves up to that commitment.”

Alistair McQueen, head of savings and retirement at Aviva, says the provider’s entire £9bn core workplace default fund is governed by strict ESG principles, which include climate change factors.

But he says it is difficult to measure some targets: “As for whether the default fund hits the 2050 climate target, we’re still asking if this can be measured and benchmarked. How do you prove that your fund is going to achieve that when the science is still moving?”

At Legal & General, 55 per cent of its indices, equities and credit portfolio for the mid-career phase members in its DC Pathway fund is tilted towards ESG factors. The ‘E’ part of its tilting involves moving away from companies with trapped carbon reserves and high carbon emissions.

Emma Douglas, L&G’s head of DC, says social and governance factors are just as important as climate issues for members.

Minimum standard

L&G will move towards being more explicit about being aligned with the Paris Agreement, but it is already heading in that direction, says Ms Douglas.

“There are still a lot of issues around definitions — aligning with the Paris Agreement seems to be an emerging standard. I would like to see more uniformity on standards across the industry, and also on how fund managers can report, because trustees and pension schemes are being asked to report on ESG,” she says.

“The more we can work towards a standard that we all agree with, rather than having lots of disparate ways of looking at it, the better.”

Transparency and reporting requirements on ESG have become tougher, while the forthcoming pension schemes bill includes a requirement for climate risk reporting in line with recommendations of the industry-led Task Force on Climate-related Financial Disclosures.

However, Mr McQueen says there could be grounds to go even further.

“Rather than just ask schemes to report on what they’re doing and educate their customers, maybe default funds could be asked to meet certain thresholds — which would be a step beyond what the government is currently saying,” he says.

“We could be interested in listening to what we should do so that pensions play their part in making the world a better place.

“There could be political tension about what right the government or a commercial organisation have to dictate how an individual’s privately earned money should be used. But we would be open to the debate.”