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New report looks at ESG risks for DC funds

23 February 2017

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The Pensions and Lifetime Savings Association (PLSA) has released a new report into the environmental, social, and governance (ESG) risks facing Defined Contribution (DC) pension schemes.

The research, conducted by Sustainalytics, assessed the equities allocation for a typical DC default fund, and mapped this against the most significant ESG risks.

Key findings include that 'human capital' is the biggest source of ESG risk at the companies in which DC default funds invest, accounting for 11% of the ESG risk to which default funds are exposed.

The research also found that climate change risks from energy use and greenhouse gas emissions are substantial, affecting 22 industries found in a typical DC default fund's portfolio - more than any other ESG issue.

PLSA said the number of savers enrolled in DC workplace schemes in the UK is expected to rise to 17 million from 11 million, with an expected aggregate pension pot of £554bn by 2030.

Currently 90% of DC savers are in their scheme's default fund.

At the same time, ESG investing has gained significant momentum in the UK, with £1.4tn in assets under management in the wider investment community in 2015, compared with £500bn in 20134.

PLSA said the combination of these two factors underscores the importance of managing ESG risk in default fund arrangements.

Luke Hildyard, policy lead: stewardship and corporate governance at PLSA, said: "Pension funds are moving beyond the debate about whether the environmental and social impact of their investments matters to long-term returns, and on to what they should do to manage it."

"We commissioned this research to understand the scale and type of risk facing DC pension savers and the findings demonstrate the importance of stewardship activities around issues including human capital, business ethics, data security and climate change."

First published 23.02.2017

Lindsay.sharman@wilmingtonplc.com