Nest is looking to benefit from a low-carbon economy through investments in green technology, in a triennial update of its investment beliefs announced today.
The state-sponsored mastertrust has updated its investment beliefs to reflect an increased interest in long-term and responsible investments.
Unsurprisingly, we do see more interest from [defined contribution] schemes... offering products with an ESG flavour
John Belgrove, Aon Hewitt
A long-term view of the environmental, social and governance policies of an investee company has become a more popular approach, but one that investment experts say may only be relevant to certain scheme types.
Paul Todd, assistant director of investment at Nest, said it would focus on identifying companies standing to benefit from a low-carbon economy, rather than divesting from those set to lose. “It’s more about what are going to be the successful plays in the future,” he said.
However, this more granular approach is a medium-term goal, restricted until the £104m¹ scheme has more assets under management, Todd added.
“It’s a while before we’re [going to be] big enough to put this into practise,” he said. “Our focus will be more about the engagement and voting piece.”
The belief that “economic conditions and long-term market developments inform our strategic decisions" was one of the nine revised and updated investment beliefs released by the scheme. Todd did not comment on which investments were considered overvalued in light of this belief.
Lisa Beauvilain, investment manager at asset manager Impax, said UK pension schemes were lagging behind US pension funds and UK private wealth managers in seeking companies that would thrive in a low-carbon world.
“Some investors are still under-allocated to the [low-carbon] solutions sector, but I think that’s operating with a bit of a lag… that will come with time,” she said.
Chasing lower volatility
Nest chose to strengthen its belief in incorporating ESG issues into investments because internal research showed lower volatility and better risk-adjusted returns for companies with higher ESG ratings.
“Before, we said it could be a reason to act, but now we’ve seen we need to make it more integral… Markets aren’t really pricing-in carbon risk at the moment,” Todd said.
The mastertrust recently introduced two emerging market funds to its portfolio, one of which includes an ESG screen. The screen takes a number of factors such as corporate governance into account and has resulted in around 80 stocks being excluded.
A 2012 report by Deutsche Bank found 89 per cent of academic studies on the subject showed companies with high ESG ratings exhibited market outperformance.
However, consultants said the differing environmental and social beliefs of individual members could make ESG a difficult proposition for some schemes.
John Belgrove, senior partner at consultancy Aon Hewitt, said it has "struggled to gain traction in the beliefs and therefore investment policies" of defined benefit trustees.
He added: “Unsurprisingly, we do see more interest from [defined contribution] schemes – whereby offering products with an ESG flavour may appeal to a subsection of members who can make that choice for themselves”
Paul Kitson, partner at consultancy PwC, said while DB schemes were sometimes reluctant to make value judgments on behalf of their members, the debate around ESG in general was moving away from being a moral issue towards a financial one.
"It's no longer, 'Do we believe in green or not?'" he said. "It's more moving to, 'Are we being negligent in how we invest our DB assets by not considering how we allocate these assets?'"
Other new beliefs introduced by Nest are the use of passive management for developed market equities, while allowing for active management when the proposition matches the scheme’s criteria. Another new belief is using an in-house team for strategic decisions.
Todd said schemes using an “appropriately resourced” in-house team involved in areas such as fund manager oversight and responsible oversight generally performed better than those with external teams.
¹This figure is taken from Nest's 2014 accounts. Since publication, Nest has provided us with an updated figure of £180m for its assets under management.
