ment return were in their mid-30s. This has led us to recali- brate our default options to members. Thus far, we have three risk-rated growth funds, so members can pick whether they want to take a little bit less or more risk in the early phases. We are moving away from that towards beliefs based, due to demand.
Our flagship fund is 100% ESG. It has an impact allocation, some private market assets and green bonds – it is a potent mix.
Back to my pricing point, if we have employers, or indeed members, that want to pay a little bit less, perhaps go a little bit slower and be a little bit less impactful, we have a strategy for them. Conversely, if they have a strong desire to invest in a more aggressively impactful way, and they are willing to pay a bit extra, then they can do that. We are at a potential point of inflection. Based on this subject of sustainability, we need to be looking at different growth assets because of the bigger macro climate. But the sustainable agenda forces you to look for more actively managed mandates and infrastructure venture asset classes.
ESG and sustainability are big issues for the regulator. What is the policy intent here on things like climate risk reporting? Smart: The policy’s intent is to ensure members are not adversely financially affected by climate risk or other ESG risks. It is not just about filing in a Task Force on Climate-Re- lated Financial Disclosures [TCFD] statement.
It is about a scheme understanding where they are financially exposed to climate risks, having a plan to mitigate those risks, enacting that plan and measuring how they are doing against it. I have never understood the clash between sustainable invest- ing and fiduciary duty. They go hand in hand. Obviously, when more aggressive exclusions are put in place it can get a little more difficult. But it is about good investment governance and taking account of all the risks out there, of which climate is a big one. Bucksey: It is not only about risk, but embracing the opportuni- ties that investing sustainably should give. Smart: And recognising there are metrics within TCFD that can be backward looking. We are keen not to get too driven by things that create perverse outcomes and incentives. For exam- ple, if the push for a net-zero world means not investing in or- ganisations with a high-carbon footprint now but they will be the major investors in the clean energy of the future. That is not necessarily a good outcome for savers or for anybody else. These things are tricky.
How influential is ESG in DC portfolios? Humble: It’s significant. In all our conversations with employers in the past three years ESG played a big role, which is remark- able. Some of that is due to regulation, but it is also driven by an interest in risk and the investment opportunities as well as by member engagement.
The majority of DC members are quite passive in terms of
We want competition in the market, not just on costs and charges but on
good outcomes, too. Sarah Smart, The Pensions Regulator
November 2022 portfolio institutional roundtable: Defined contribution
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