Has climate investing moved from self-select to defaults?
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The Babcock International Group Pension Scheme has added a climate-focused fund to its defined contribution section. When will climate-aware investing move from the self-select options to the default?
The scheme’s £807m DC section, which is run by Aviva, has added the Aviva (Pension) Climate-focused fund to its self-select range, making this the 9th option in the self-select offer, highlighting the scheme sponsor’s 2040 net zero commitment made last June.
The fund is a 50/50 blend of the Pictet Global Environmental Opportunities Fund and the Impax Environmental Leaders Fund. It aims to give exposure to actively managed equities by “companies that provide effective products and services that help reverse ecological damage, benefit from long-term sustainability-linked trends and the resultant increases in resource demand”, charging annual management fees of 1.13%.
The Babcock scheme’s DC committee carries out annual ESG monitoring of several of the DC section managers and will consider how to extend this to other managers in the DC section in future, the scheme said in its latest annual report, suggesting that its climate monitoring will intensify.
The move by the Babcock scheme follows pharma giant GSK’s DC revamp last year, which included the introduction of a sustainable equity fund to the self-select range. However, GSK went further and also decided to give a 50% carbon tilt to its global equity fund.
Consolidation could increase focus on climate
With the vast majority of DC members saving in the default strategy, adding self-select options to provide climate-aware investment opportunities tends to have little impact. Few schemes have gone further. The DC scheme of HSBC acted as a trailblazer in 2016 when it decided to make a climate tilted fund its default option, but movement in this area has been comparatively slow since then. New rules on climate scenario analysis brought in last year, and scheme sponsors’ obligation to become net zero in future, could change this, however.
Sonia Kataora, a partner at consultancy Barnett Waddingham, said her firm is increasingly seeing DC schemes offer climate-aware funds to their members. “In the past year or so, we had seen this simply as the addition of a fund within the self-select fund range driven by the desire to engage members with their pension saving,” she said. However, as more and more companies have considered their own climate and net zero policies, “there is a movement to integrate such funds within their default strategies”, she noted.
The transition to a low carbon economy will be in focus when schemes come to choosing a master trust as well, she said. “It is therefore unsurprising that the majority of them are adopting a 2050 net zero target, with a handful of providers who are on a more ambitious pathway,” she said. This trend will lead to greater integration of climate-aware funds within the default strategy. “We have already seen evidence of this,” she remarked.
But there are “different shades of green”, Kataora noted, with some schemes simply making minimal exclusions, while others make more substantial tilts to their portfolio.
