Trustees will soon be under scrutiny for not investing their defined contribution schemes' default funds in an ESG-conscious manner, TPT Retirement Solutions investment manager Jennifer Anderson has warned.

Speaking at the PLSA Investment Conference 2018 in Edinburgh, Anderson stated: “I don't think it is going to be long before you are hearing the question, 'why isn't your DC strategy being invested with ESG in mind?'. So I think the question is going to get more challenging for trustees to justify not considering ESG as part of their fiduciary duty.”

Anderson noted that there is a question around whether members desire this, as while many may express an interest in ESG issues, very few move into a specific ESG-focused fund. However this is why ESG considerations need to be incorporated into the default, she explained.

She also said that the pensions industry is thinking about ESG factors more seriously due to an increasing focus from both the government and The Pensions Regulator, along with the upcoming IORP II Directive requiring ESG issues to be taken into consideration.

Anderson highlighted schemes such as NEST and HSBC's as leading the way with ESG incorporation into DC default funds, adding that having these examples “is really helpful and gives other trustees confidence to go down this route”.

Acknowledging that it is easier to incorporate an ESG focus into equity investments compared to other asset classes, Anderson however noted that equity allocations are still the largest component of a DC fund's growth strategy. Therefore, “if trustees can address equity processes [with consideration to ESG] then they still have made good progress”.

Having a staged approach to applying ESG into a default fund “is more manageable than trying to do everything at once”, she added.

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