mallowstreet research for the Trustee Report 2022 reveals that 81% of UK schemes now discuss ESG and climate-related issues in board meetings, but only 16% are actively decarbonising their existing portfolios – and just as few are moving assets towards ESG leaders and climate solutions. Is the UK pensions industry ignoring the net zero transition? Not quite, but DB and DC schemes are fighting different battles… and DC schemes face greater challenges. 

 

 

SOFI, mallowstreet’s proprietary AI software, has long set out the baseline for most asset managers: not only do UK pension funds expect them to take careful consideration of ESG risks, but they should also at least engage with issuers and investee companies and influence them for the better. 

 

However, the Trustee Report 2022, released in partnership with Janus Henderson Investors, reveals an important contrast. Unlike their DB peers, DC schemes place acting in a responsible manner at the top of their ESG strategy, above regulatory compliance. Furthermore, they are more likely to prioritise not only member concerns, but also increasing investment returns via their ESG approach. 

 

 

 

The importance of acting in a responsible manner is also evident in DC schemes’ commitments to various climate change and sustainable investing initiatives – for example, they are increasingly likely to become UN PRI signatories, sign up to one or several UN sustainable development goals, as well as the UK Stewardship Code. 

 

 

 

Given the proactive role DC schemes want to play in the net zero transition, it is not surprising that 70% of them seek detailed reporting on engagement outcomes from their managers – compared with just 26% of DB schemes. DC schemes similarly expect more detailed reporting on the positive contributions managers are making on ESG issues. All this is reflected in the ESG metrics they expect from their managers (chart not shown). 

 

 

 

Not only are two in five DC schemes now members of the Net Zero Asset Owners Alliance, but over 80% have set net zero targets – four times the proportion of DB schemes. DC schemes are also much more likely to have climate positive investment targets. 

 

 

 

Despite their proactive stance, DC schemes are more likely to face challenges when implementing their ESG strategy. To begin with, they are twice as likely to worry about insufficient reporting from investee companies than DB schemes. This explains why 70% of DC schemes name greenwashing as a key challenge and say that manager disclosures lack the standardised data they need to fulfil their reporting obligations. More worryingly, DC schemes are twice as likely as DC schemes to complain about the added cost of ESG investment solutions. 

 

 

 

 

As DB schemes continue towards their endgames, many asset managers want to re-orientate their offerings towards DC schemes. However, it takes more than just repurposing existing funds to truly cater to this growing audience – and managers who take the time to uncover their true needs are few and far between. We are currently planning in-depth research on the DC market in late 2023 and early 2024, so contact us if you would like to become a research partner, strengthen your brand and improve your positioning.