Nigel Aston is director of defined contribution at SEI, which manages the SEI Master Trust
For pension plan members, the distinction between how they think about retirement savings and personal spending is vanishing. Retirement funds can no longer be managed in a black box, as long as returns are good. Today’s consumers understand that their money has the power to change the world, and that the world has the power to change their money.
They are also starting to vocalise their knowledge that certain global issues, in turn, have the power to affect how their savings grow. The pensions industry should listen and take note.
The notion that money, whether it is spent or invested, carries intention has never been more pertinent. Members are demanding their investments, savings and day-to-day purchasing reflect their values and are directing their spending and allocations accordingly.
This heightened sense of responsibility and influence led to European sustainable funds attracting €120bn (£102.6bn) in the first quarter of 2021, which is 18% higher than the previous quarter and 51% of total in-flows1.
However, many investors are becoming increasingly aware of, and concerned by, persistent greenwashing, which can foster mistrust and doubt. This is especially unfortunate considering the growing possibility that sustainable and responsible investing can otherwise drive real change and help improve long-term returns.
It is crucial that managers address the rising interest in sustainable and responsible investing. Results from Cambridge University research provide robust evidence that information on fund sustainability affects decision-making when presented clearly.2
Accurate fund-by-fund ESG credentials and an overarching approach to sustainability oversight and engagement at the provider level are critical. Even if a scheme ultimately decides that a sustainable-first approach is inappropriate for their members, it is essential that these factors are understood and taken into account.
Otherwise, ESG matters can influence performance without members understanding how or why.
Currently asset managers seemingly disagree around what constitutes ‘sustainable’. Perhaps this is because the complexity of European and incoming UK regulations make the area increasingly foggy.
So, where does this leave pension plans and members who find it hard to know how to proceed? For either the plan or the member, if there is an overriding conviction to disassociate from certain names or sectors, then screening those out of a portfolio is most likely the right fit.
However, in other situations, a best-in-class approach investing in the companies striving for solutions to our global crises may be preferred.
Regardless of which approach, we believe they are best accompanied by stewardship and engagement efforts to advance important ESG initiatives through active ownership. It is important that the industry lift standards through engagement and partnership, not by excluding ourselves from the conversation.
1) Morningstar European Sustainable Fund Flows: Q1 2021 in Review
2) Walking the talk: Understanding consumer demand for sustainable investing. – University of Cambridge 2019