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PLSA 2022: ESG and private markets dominate the debate

by and

26 May 2022

Tackling climate change, ESG integration and investing in private markets were key themes at the PLSA’s first in-person investment conference for two years, but asset owners are approaching these topics with caution, find Mona Dohle and Andrew Holt.

PLSA

Tackling climate change, ESG integration and investing in private markets were key themes at the PLSA’s first in-person investment conference for two years, but asset owners are approaching these topics with caution, find Mona Dohle and Andrew Holt.

PLSA

“A new boost” was the theme of the first in-person PLSA Investment Conference, held two years since the beginning of the first lockdown. Tackling climate change through ESG integration and increased investment in alternatives, private markets in particular were the dominant topics throughout the conference.

The event was marked by a sharp contrast in views between optimists such as PGIM chief executive David Hunt, who predicted that inflation levels would normalise and the beginning of a “private markets revolution” to a more cautious outlook from many asset owners who were visibly concerned about rising inflation and the prospect of further market corrections.

Nevertheless, tackling climate change remained a dominant topic. And pension schemes have made significant progress on that front, as a PLSA survey revealed.

Two-thirds (63%) of schemes have started working on their Taskforce on Climate-related Financial Disclosures (TCFD) report, with over half (55%) saying they are within the scope of the reporting deadline and so plan to publish one this year. With new TCFD requirements coming into force, the number of schemes making such commitments is expected to grow further still.

David Russell, head of responsible investment at USS Investment Management, noted at one session that pension schemes are focused on two things in regards to climate change: one, the actual commitment to net zero and the challenges that brings, and two, the need to report what they are doing via TCFD and the metrics and requirements it demands.

Additionally, The Pensions Regulator (TPR) and Department for Work and Pensions (DWP) now require larger schemes to use the TCFD framework to report on their portfolios. PI heard from one pension fund that it felt frustration on the work on TCFD from TPR, which was described by the fund as “confusing”, and hindered progress, not helped. 

Schemes are also embracing the concept of stewardship. PLSA revealed two-thirds (68%) see their key priority as investors, as being climate transition plans. Over half (56%) see these being net zero targets, while around a third (37%) see board diversity and human rights (35%) as key priorities. More than a quarter (28%) have gone a stage further and said that they have already published their TCFD report, despite it not being a mandatory requirement.

In terms of non-climate related ESG factors, diversity and inclusion (51%) and human rights (49%) are seen to be the most important, numbers that arguably, need to rise.

The potential for DC schemes to invest in private markets was also high on the agenda. And a brief poll among the audience showed why.

While only a quarter of attendees in a session on DC schemes and private markets are invested in the asset class, nearly half, 44% of attendees  said they are considering  allocating to the asset class. Overwhelmingly, risk adjusted returns are the motivating factor, according to 57% of attendees while only 7% said they saw private markets as a hedge against inflation.

But the debates also revealed a healthy degree of caution. Asset owners appear acutely aware that the global economy may be on the bring of recession. This chimes with a gloomy economic  forecast and UK inflation recently hitting 9%.

Consequently, questions on the floor focussed on whether the push for private markets can be combined with a potentially greater need for liquidity, how sustainable returns profiles in private markets are and if asset owners should be worried about the high levels of dry powder. This tied in to cautious questions on value for money, which continues to remain a key concern for many DC schemes looking to diversify their portfolios.

Regardless of one’s outlook, what united attendees at the conference is a sense that the global macroeconomic backdrop is on the verge of dramatic changes, and investment strategies will have to change with it.

PLSA chair Emma Douglas addressed this in her opening speech: “The huge geopolitical change we’re seeing now could have big impacts on the way pension schemes invest in future. The PLSA is taking an active role in the key policy debates and making the voice of our members heard.”

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