Meeting ESG requirements is the prevalent barrier to implementing new ideas in DB portfolio management
Image: Canva
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
mallowstreet, in partnership with Aon, surveyed 54 UK defined benefit (DB) schemes, gathering perspectives on more than £400bn in assets under management. The research found that meeting ESG requirements is one of the more significant barriers to DB portfolio innovation – and this is a key area that fiduciary management can help address.
For those faced with innovation barriers, ESG requirements are the main one
Around 60% of corporate DB schemes state that they do not face any noteworthy barriers in implementing new ideas or adding new managers in their investment portfolio.
However, among the remaining 40%, meeting ESG requirements is the dominant one: 40% say this is their biggest investment challenge (i.e., this is 9 out of the 22 schemes which do face noteworthy barriers to new investment ideas). This mainly includes schemes which are subject to the Pension Regulator’s mandatory ESG disclosure rules, i.e., schemes over £1bn.
Anti-greenwashing efforts may be limiting opportunities in the short term
Against this backdrop, it is surprising that less than 10% of corporate DB schemes say they invest in sustainable or impact funds with either a Sustainable Disclosure Requirements (SDR) label, or a Sustainable Finance Disclosure Regulation (SFRD) designation.
However, SDR labels in the UK are still quite new. Ally Georgieva, Head of Insight, adds: “Only a few managers have chosen to apply for them. Additionally, as anti-greenwashing pressures spread Europe-wide, many fund managers chose to relinquish their SFDR Article 8 and 9 designations. With increased regulatory and reporting requirements, there may be a short-term shortage of investment solutions that fit the ambitions of DB schemes.”
Can delegated portfolio services bridge the gap?
This is perhaps why 22% of corporate DB schemes would consider delegated services to increase the level of ESG integration and engagement across their portfolio.
Philippa Allen, Portfolio Manager at Aon explains:
“We believe that, if done well, delegated services are a fantastic way to ensure schemes are getting robust ESG integration and access to market-leading ESG solutions. For example, our delegated client portfolios have ESG fully integrated throughout. Only managers with a high enough ESG rating can go in portfolios. To achieve that rating, we have a formal, centralised engagement programme that works with managers.
We have also made net zero commitments for our delegated portfolios. Additionally, clients can customise their portfolios to incorporate allocations that go further on ESG – like our impact equity or sustainable credit solutions. A delegated approach also takes a lot of the governance and reporting burden off clients’ hands.”
For more information please visit aon.com/investment
