Industry Comment

SPONSOREDSustainable investing in the DC world

ESG MapClaire Felgate, UK DC pension schemes expert at BlackRock, discusses with Nick Fitzpatrick, editor at Funds Europe, how modern DC pension schemes are adapting to sustainable investment requirements.

ESG Investment Statements: This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator. The environmental, social, and governance ("ESG") considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Claire Felgate, a self-described “pensions nerd,” says the DC pensions industry is at an “exciting” stage of development as schemes increasingly adopt sustainable investment models. Felgate has recently observed large volumes of assets in DC moving towards sustainable investments. The extent to which DC schemes embrace sustainability can depend on the demographic of scheme members. Nevertheless, more of them do display greater engagement with their plans, and numerous corporations are aligning their scheme’s investments with sustainability policies.

There has been a notable increase in options and availability for DC schemes to invest with a sustainability objective, she points out.

An average member of a DC pension plan is typically younger than someone in a DB scheme, especially a closed DB scheme. DC plans are generally newer than closed DB schemes and serve as the primary savings method for many younger members. “They are more likely to be interested in sustainable matters, actively reaching out to their employers and HR representatives with queries, thereby providing valuable feedback to the decision-makers,” says Felgate.

Key drivers of a sustainable investment portfolio

The ease of a DC scheme to implement a sustainable investment strategy depends on its governance structure, Felgate says. In the UK, for example, there are both single trust and DC schemes that have transitioned into master trusts, or they operate within a group personal pension structure. “In some ways, that has been fairly easy for them to implement, particularly those driven by regulation. It could be harder if you have a single trust that you are managing yourself. However, being single trust also offers advantages because you can implement things better aligned to your sustainable policies.”

Availability of investments is another factor. Felgate says doors are opening for DC schemes when it comes to considering investing in certain illiquid assets. This is due to the removal of performance-based fees, and their interaction with the charge cap limit of 0.75% (source:, 30 January 2023). Felgate goes on to say that within this area there is “some cool, cutting-edge progress in sustainability”, which can only be accessed through private markets investments.

An example is BlackRock’s investment in a femtech company dedicated to women’s health, she cites. “This is a privately held asset that is not available through public markets.”

Felgate identifies four primary drivers for sustainable investing:

Primarily, clients increasingly desire to comprehend how their funds are invested and how investment aligns with their personal goals.

Regulation, such as the Task Force on Climate-related Financial Disclosure framework, is the second factor, followed by the aim of delivering long-term value creation and risk management, which Felgate says is a key focus for BlackRock.

“Sustainability - being a mega-trend within investment - means we aim to help our clients understand how sustainability factors, such as climate change and the transition to a low-carbon economy, could impact their portfolios, including potential risks.

“Additionally, we want to ensure they can seize investment opportunities to benefit their DC members when they arise.”

Data Dilemma

According to Felgate, there are two categories of data - funds data that managers consume, and data shared with clients.

“The first deals with public markets, where data has been available for longer. It is relatively more transparent, although it is not flawless. The industry has made more progress in this area.” She says how BlackRock deploys tools like Aladdin to facilitate data gathering and usage. This includes both BlackRock data and data from external sources that help investors model their portfolios and evaluate their data-driven position accurately.

The second area – data shared with clients – concerns illiquid investments. According to Felgate: “Private market investments have been less consistent with the data and a tad less transparent. Our primary goal here is to promote disclosure and we actively implement this by incorporating it into the fund documentation.”

Data availability varies at different stages of its lifecycle, making it “a work in progress”. As Felgate cites, environmental data, especially regarding carbon, is well-established and data-rich. In contrast, data is scant in newer areas like social factors or biodiversity.

Such gaps mean that asset managers, data providers, and other stakeholders in the industry are continually investing in advancements to data and analytics in order to meet their reporting obligations to clients.

Experts, alternatives and extra value

Before setting off on the sustainability journey, Felgate urges scheme trustees and managers to consult with scheme partners. “You will be amazed at how much information suppliers can provide,” she says. Additionally, set goals for the DC plan. A good starting point, says Felgate, is to evaluate the corporate sponsor’s sustainability goals and see if these are suitable goals for the associated DC plan.

Thirdly, “analyse what you have and where you need to get to”, she says. “Consider conducting stress testing to assess how far a DC scheme is from hitting sustainability goals and what will give a scheme the ‘most bang for your buck’.”

For Felgate, sustainable investment is not about values, but about value. “For BlackRock, sustainability is about creating financial wellbeing and delivering value for members.”

And with value in mind, she advises that it can also help to explore uncharted territories to help meet unique sustainability goals. Again, this could mean alternative investments, such as private equity, which Felgate says could not only increase a DC scheme’s sustainability credentials but also deliver extra value for scheme members, too.

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Risk Warnings: The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. While proprietary technology platforms may help manage risk, risk cannot be eliminated. This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons. Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: +44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection, telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorized activities conducted by BlackRock. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2023 BlackRock, Inc. All Rights Reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. MKTGH1023E/S-3180247

© 2023 funds europe

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