DC schemes slow to integrate ESG factors into defaults

Defined contribution pension scheme trustees are not doing enough to integrate environmental, social and governance (ESG) factors into their schemes’ default funds, according to Sackers.

In a survey of pension trustees and managers, Sackers found that less than a fifth of respondents believe that DC trustees are doing enough to take ESG factors into account when considering appropriate investment options for members.

In contrast, over a third of respondents felt that trustees are doing enough in relation to DB investments.

The law firm has said that the finding is concerning and is at odds with the fact that most new member contributions are now being saved into DC schemes. “Such members,” said Sackers in the survey report, “probably have a much greater long-term financial exposure to ESG issues, particularly climate change.”

However, the report also states it is not altogether surprising that DC schemes are lagging behind DB schemes given that the investment toolkit for a DC trustee is much smaller and that DC default funds generally following passive investment approaches constrained by costs and charges limitations.

“It is ironic that the regulatory requirements for DC schemes are more stringent and come in sooner than for DB schemes,” said the report. “In reality, only the development by investment providers of a greater number of low cost funds with deeper ESG integration, and demand from DC trustees for such products, will improve the picture for DC members.”

The survey’s respondents also said that clear, jargon-free advice and guidance on ESG products and services needs to be more accessible for trustees and that there was confusion around the extent to which member views should be taken into account when discussing and implementing investment funds.

Forty per cent of respondents said that in relation to trustee fiduciary duties is still lacking.

At the same time, over a third of respondents felt that DB investment strategies should be influenced by member views, with the proportion increasing to over 75 per cent for DC default funds.

Sackers partner, Stuart O’Brien, added: “Despite these broader concerns, there was a clear recognition of the importance of ESG and climate issues to pension scheme investments from respondents, whose trustee boards are working hard to comply with their fiduciary duties and achieve the best outcomes for their members.”

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