The way companies treat their employees is the largest source of ‘responsible’ investment risk among certain UK pension schemes, according to a major trade body.
“Human capital” accounts for 11% of the risk and there are substantial risks associated with climate change, the Pensions and Lifetime Savings Association (PLSA) said.
The research focused on environmental, social and governance (ESG) criteria within the default funds of UK defined contribution (DC) pension plans.
Climate change risks from energy use and greenhouse gas emissions affect 22 industries found in a typical DC default fund’s portfolio, the PLSA said.
Sustainalytics carried out the research among the equities allocation for a typical DC default fund, and mapped this against the most prominent ESG investment risks.
PLSA policy spokesman Luke Hildyard said: “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.
“The PLSA commissioned this research to better understand the scale and type of risk facing defined contribution pension savers. The findings demonstrate the importance of stewardship activities around issues including human capital, business ethics, data security and climate change.”
Hildyard added that the PLSA will develop further resources over the coming year to help members engage with asset managers and investee companies around these issues.
The number of savers enrolled in DC workplace schemes in the UK is expected to rise from 11 million today to 17 million by 2030 when the aggregate pension pot is expected to be £554 billion (€653 billion).
Currently 90% of DC savers are in their scheme’s default fund.
ESG investing has increased significantly in the UK in recent years, rising from £500 billion of assets under management in the wider investment community in 2013 to £1.4 trillion by 2015.
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