The defined contribution scheme of aeroplane maker Airbus has switched its default option to a low carbon global equity fund and added two new options to the self-select range, following member feedback. The fund aims to reach net zero emissions by 2050. 

The scheme said members wanted ESG considerations to be better reflected in the investment options, prompting the trustees to review the investment offering. They then decided to switch the global equities in the default strategy to a low carbon global equity fund. The Airbus Global Equity Fund was worth £194m last June. 

“This change had a material positive reduction on the carbon footprint of member savings, without reducing the expected investment return and importantly reducing charges for members,” said trustee chair Lukshmi Selvarajah, from Capital Cranfield Trustees.   

The trustees also introduced an active responsible investment equity fund and a passive fossil-fuel free equity fund to the self-select range to give members further choice from February 2023. By June that year, the fossil fuel-free fund managed by Legal & General had grown to about £123,000, while the active L&G (PMC) Columbia Threadneedle Responsible Global Equity Fund contained only £6,600.  

Selvarajah said the changes were carried out “after careful analysis and advice from the trustee’s investment advisers”, to align with members’ preferences as well as long-term investment objectives.   

“The trustee will continue to review and monitor the investment offering on a regular basis and is committed to making further enhancements where appropriate,” she added.  

Factoring ESG into the DC default is now the rule rather than the exception, said professional trustee at Pi Partnership, Paul Black. Typically, the default fund remains in mainstream global equities but with exclusions and tilts towards companies with better ESG credentials.  

The drive for this comes “from all angles”, said Black, not just members, noting that he has not seen any increase in member surveys being conducted. Often there is input from committees on the corporate sponsor’s side, he said, as companies are themselves more aware of ESG. Sectors that are currently among the most polluting ones – such as the aviation industry – are under particular pressure to do more on ESG. 

“They have to be the ones looking at this more seriously because they will have to undergo the biggest change,” he said.  

What is more, the performance of climate or carbon tilted funds has been “pretty good”, on the whole, according to Black.  

Head of DC investments at Hymans Robertson, Alison Leslie, agreed that many schemes introduced some form of ESG into their default strategies several years ago – ranging from only excluding certain companies, to positive tilts to firms which score well on ESG issues. Some schemes have gone further, she said, pointing to DC master trusts, which have net zero commitments or in some cases impact investment targets. 

 

“There are relatively few schemes which have not, at least to some extent, moved towards a more ESG-focussed default, and where this is the case, it’s generally because of a specific investment belief from the trustees or governance committee,” she said. 

 

ESG-tilting has to date generally been confined to the equity portions of DC schemes, Leslie noted. However, she said more funds are now becoming available in other asset classes such as bonds and cash. 

 

“We’re aware of some schemes which are looking to build default strategies which incorporate ESG credentials at each stage of the glidepath,” she said. 

 

DC trustees are also beginning to look at factors other than climate. “To date, most of the focus has been on the ‘E’ of ESG and carbon emissions. We expect attention to switch towards the ‘S’ or social factors going forward, alongside biodiversity and the role natural capital plays. The role of illiquid assets in DC strategies should enable the larger schemes to access investments in these areas and have a greater real-world impact,” she said. 

 

 

Stewardship has moved up the agenda as DC schemes become more experienced responsible investors. 

 

“Many of the larger clients are also looking at how they can help to support some of the high emitting companies reduce their carbon footprint and are actively looking to invest in these companies to drive real world change,” according to Leslie. 

 

 

There is now greater demand for more granular reporting in aspects such as voting and engagement, she noted, while more DC funds use their mandatory implementation statements not just as compliance documents but to examine how their different managers have voted. 

 

“These clients have then gone on to explore with those managers who they engage with at companies, what their voting policies are, why they’ve voted the way they have on specific resolutions and what they’ve done after votes to re-engage,” she added. Some larger DC schemes are now looking at establishing their own voting policies. 

 

Investment beliefs tend to drive these changes, and schemes also seek member views on ESG. However, Leslie warned that the results often show a polarised membership. While some members might be happy to pay higher fees to invest responsibly, others might focus purely on cost.  

 

“This often makes it challenging for trustees to get the right balance,” she said.  

 

What are the hurdles DC schemes face when it comes to ESG?