How might DC investment reforms accelerate the push for net zero?

In October, it consulted on removing performance fees from the charge cap, which is expected to make it easier for DC schemes to invest in private markets and illiquid assets, just like their defined benefit pension peers. 

It also proposed amending regulations to compel schemes with more than £100mn in assets to disclose and explain their illiquid policies in their statement of investment principles.  

This is expected to offer a broader array of environmental, social and governance or impact strategies, which in turn could help accelerate the move towards net zero targets. 

Just excluding or divesting from non-sustainable assets is not going to have a sufficient or timely enough impact on society and our broader net-zero goals

Joanna Asfour, Partners Group

Cartwright senior investment consultant Adam Gregory says: “It’s clear from survey data that a large number of DC members care about how their investments are managed, and any reform that helps facilitate ESG solutions must be a good thing, encouraging the shift of capital towards a net zero world.

“Impact investments provide clear examples of their investments that resonate with people and will help them understand how their investments work for good and how they deliver a return on investments at the same time.”

Private managers can influence businesses

Sustainability is a long-term issue, and private markets can allow investors to focus more on the longer term than in public markets where it is easier to trade more often. 

Barnett Waddingham partner and head of DC investment Sonia Kataora points out that private market managers will generally have a bigger ownership stake in a private company compared with an equivalent publicly listed entity. 

“As a result, they can influence how the underlying businesses or assets are run, including for sustainability issues,” she says. “The ability to influence is even more tangible in property and infrastructure as fund managers may be responsible for managing the underlying holdings. This can include redevelopment to, say, improve energy efficiency.”

Renewable funds represent only a fraction of the opportunities for sustainable investing in private markets. 

In future, Kataora says, we could see “greater inflow into agriculture to act as a hedge against carbon-intensive portfolios and offset carbon emissions”.

Partners Group managing director Joanna Asfour agrees that investing in private markets can help drive the move to net zero across a much broader range of companies than just public markets.  

She argues that the asset management industry needs to move away from focusing on just negative screening: “There is growing consensus in the market that just excluding or divesting from non-sustainable assets is not going to have a sufficient or timely enough impact on society and our broader net-zero goals.  

“That's where private markets and private capital, or illiquid investments, can help, because investors can have a much greater influence by engaging with their investment managers to pressure companies or assets to change, progress or challenge their ambitions.” 

By being an active owner of those companies, managers can control those companies and assets, and effectively drive ESG criteria and change.  

“That is very different to the public markets, which tend to be more passive, working on this idea of negative screening or exclusion criteria versus the idea of sitting on a board and helping transform that asset or company and, ultimately, hand-holding those assets and companies on their journey to net zero as well,” she says. 

In private equity and private infrastructure, the asset manager can help those companies and assets on their ESG and net zero journey during the ownership period.  

Partners Group makes a commitment during its hold period, which is between five and seven years, that it wants to reduce emissions by 20 per cent. It also wants to align all of its holding companies’ net zero targets by 2050. 

“We as a firm have a climate strategy overall for investing in mid-sized companies that are perhaps more immature on their climate transition, where we can drive additional value," Asfour said.

“When we acquire these companies, some do not even have a climate strategy in place. In year one, we always want them to start measuring those emissions, and in year two, we want to know that whatever they're measuring for the GHG footprint is externally assured.” 

By removing hurdles to DC schemes investing in private markets and illiquid assets, these reforms should help accelerate the move towards net zero across a broader range of companies.