News analysis: Industry experts are coming up with inventive ways to help schemes allocate more of their assets towards sustainable and responsible investments, but pension funds are lagging behind.
There has been pressure on schemes to take into account environmental, social and governance issues when making investments, to produce more stable, long-term returns on assets.
However, trustees are in a difficult position when it comes to responsible investing as it is their fiduciary duty to invest in the best interest of members, with ethical issues a secondary consideration.
Pension schemes today have a very high exposure to pure fossil fuel industries
The responsible investment charity ShareAction found only 1 or 2 per cent of schemes currently invest in sustainable and responsible areas. Catherine Howarth, chief executive of the charity, said this number is “extremely low”.
ShareAction has instigated the Green Light campaign, which asks investors to petition schemes to “invest in safe energy, green jobs and a sustainable economy”.
Howarth said: “We are trying to point out is that [fossil fuel] industries are actually responsible for creating environmental damage which, in the long term, will be very costly to the pension fund members.”
Innovative ideas
The Environment Agency Pension Fund has said it will open a tender in January for a global equity manager with an emphasis on sustainability.
Last July, the agency said it was seeking “new and innovative” ideas on sustainable equity investment in a bid to lead best practice in the area while driving forward its responsible investment strategy.
Chief investment officer Mark Mansley said the best approaches look at mandates in terms of catching long-term investment ideas, as a result of the Kay review in 2012.
He said: “We have also seen some people involved from a very hard professional background – experienced fund managers – taking an interest in sustainable equities. That is really beefing up some of the financial understanding behind these sorts of approaches.”
Challenge for trustees
Howarth said she is “very sympathetic” to trustees. “They face genuine challenges” she said. “There are some products out there, but not many.”
She added it is up to the trustees to be clear about their demand and interest in responsible and sustainable investments.
The consultancy Mercer has put more focus on sustainability strategies in the past few years.
Jane Ambachtsheer, global head of responsible investment at the consultancy, said she thinks the “mega trends” that are shaping the economy, including climate change, resource scarcity and demographic change, create an interesting investment opportunity.
“It takes time to figure out how to do something differently. Now that we have more case studies in the market and more approaches, it is becoming easier for funds to understand the opportunities and figure out which approach works for them,” she said.
New ways to invest
Last week Threadneedle and Big Issue Invest announced the launch of the UK Social Bond Fund. Iain Richards, head of corporate governance at the asset manager, said it will make a “respectable” return and offer a clear social benefit.
The Environment Investment Organisation shares this view and came up with a different approach. It offers investors a mainstream passive investment tool with its Environmental Tracking Index Series, which ranks listed companies by those with the lowest emissions. It is designed to encourage emissions reductions and greater transparency while tracking the market.
“We are offering pension funds a tangible, meaningful and credible way to help reduce climate change,” said CEO Sam Gil.
