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It's All About You: #ESG Risks In #Pension Schemes

Posted on February 21, 2017 at 8:05 AM

It was only a matter of time before Environmental, Social and Governance (ESG) risks were recognised as being personal. Volkswagen opened that door in a different way, for consumers. Now the focus is on pensions.


The Pensions and Lifetime Savings Association (PLSA) has today released its newly commissioned study into the environmental, social and governance (ESG) risks facing members of default funds offered by defined contribution (DC) pension schemes in the UK.


The number of savers enrolled in DC workplace schemes in the UK is expected to rise to 17 million (up from 11 m today) with an expected aggregate pension pot of £554bn (potentially as high as £914bn) by 2030; and currently 90% cent of DC savers are in their scheme’s default fund, it says.

At the same time, ESG investing has gained significant momentum in the UK, with £1.4tn in assets under management in the wider investment community in 2015 versus £500bn in 2013. "The combination of these two factors underscores the importance of managing ESG risk in default fund arrangements" says the PLSA.


The research has been done by Sustainalytics, a global provider of ESG and corporate governance research and ratings. It assessed the equities allocation for a typical DC default fund, and mapped this against the most prominent ESG risks. Key findings include:


First, and importantly - ‘human capital’ is the single biggest source of ESG risk at the companies in which DC default funds invest, accounting for 11% of the ESG risk to which default funds are exposed. (my emphasis)

Climate change risks from energy use and greenhouse gas emissions are also substantial, affecting 22 industries found in a typical DC default fund’s portfolio, more than any other ESG issue.


“Pension funds are moving beyond the debate about whether or not the environmental and social impact of their investments matters to long-term returns and on to what they should do to manage it" said Luke Hildyard, Policy Lead: Stewardship and Corporate Governance at the PLSA.

What can one say ? Thank goodness for that.

Or as the author of the report  Doug Morrow at Sustainalytics said:


“Given the convergence of UK market trends, understanding and managing ESG risks in DC default funds is becoming increasingly important. Our research findings reveal pension schemes can potentially mitigate these risks by embedding ESG investment products in default fund allocations and engaging on ESG issues with external managers and investee companies. We applaud the PLSA for raising awareness of this critical topic and believe these findings will help to advance the dialogue around ESG issues and default funds.” (my emphasis).

Categories: ESG, Risk, Governance