Claire 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.

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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: www.gov.uk, 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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