Investor Insights Survey
March 2022
Changes in climate policies and public perception, along with technological advances, are already causing impacts on investors and businesses, resulting in both risks and opportunities as the UK looks to achieve net zero by 2050. Managing these is essential to achieving good investment outcomes.
We asked 91 investors in October, November and December 2021 about their attitudes and actions during this period of adaptation and change, with sustainability rising on investor agendas as the UK transitions to a low carbon economy.
Guy Opperman MP,
Minister for Pensions and Financial Inclusion
Climate change is the number one issue of our generation, and as such,
it carries a material risk to our financial investments. (Through regulation,
the government is looking to) ensure these risks are accounted for, and
are done so with total transparency.
What are the most important ESG themes to investors?
A changing landscape
13%
Minimum compliance approach
16%
Deep integration across portfolio
33%
Some integration across portfolio
34%
Just getting started
What approach are investors taking to ESG in 2021?
This is important for all investors because there are opportunities that come from ESG as well as risks. For climate change, opportunities arise from mitigation, like renewable energy, as well as from adaptation, like infrastructure and new technologies.
Two respondents say they are considering ESG because they see investment opportunities.
17%
Following peer influences
28%
Demand from members, beneficiaries
and policyholders
57%
Adviser recommendations
77%
Managing risk
91%
Responding to evolving regulation and legal requirements
Why are you considering environmental, social and governance (ESG) factors in your investment decision-making and implementation?
We asked what was driving investors to consider ESG and found a range of responses, with a number of participants providing other motivations, including some who said they were looking to align with the policy of their pension scheme's sponsoring employer. Further reasons included some looking to do the right thing, a desire to have an impact and to create better outcomes.
It is positive to see only 13% of investors taking a minimum compliance approach to ESG investing. Regulation isn't a blueprint for running a successful pension scheme, trust or endowment.
Those who embrace the opportunities from ESG as well as those who effectively manage risks and integrate sustainability considerations into their investment thinking should be well-placed for the transition to a low carbon economy.
Drivers of ESG investing
87%
Climate
change
49%
Biodiversity
and ecology
47%
Just transition
to a low carbon economy
41%
Supply chain transparency
including workplace
safety and standards
32%
Sustainable
land use
27%
Gender
diversity
25%
Multicultural
diversity
22%
Pay inequality
20%
Packaging
and waste
15%
Health
14%
Tobacco free
finance
5%
Fair taxation
When asked which issues would be most concerning for them as investors, trustees and asset owners were split in their views.
Investment concerns
• Animal testing
• Modern slavery
• Not producing controversial weapons and
• complying with UN Global Compact
• Bio-fuels and alternative energy sources
• Employment treatment of staff
• Long term view and good governance
• Human rights
• Extractive industries
Other ESG areas investors prioritise
48%
Recommendations of their advisers
What would encourage investors to make a significant shift in their investments?
While scientific evidence on climate change could get some investors to make significant changes, very few will be swayed by government guidance.
42%
New regulations
7%
Scientific evidence on the impacts of climate change
3%
Government guidance
6%
Changed asset allocation
6%
Changed managers
18%
Changed funds
24%
Reviewed current holdings/managers
To those running pension schemes we asked what action had they taken due to ESG regulation?
38%
27%
16%
20%
Fall in equity values
of 20%
Additional rise in average global temperatures of 1°C*
Rise in inflation by 4%
Fall in gilt yields
2%
Changed adviser/ consultant
* In 2021 we are at 1.2°C above pre-industrial levels so this would be equivalent to a 2.2°C temperature rise above pre-industrial levels.
This is something DWP and TPR should take note of in their drive to get pension schemes to take account of the risks and opportunities stemming from climate change and the shift to a low carbon economy.
It is heartening to see trustees are willing to make changes where they are not getting what they need from their consultants and managers on ESG. With 25% of trustees saying they plan changes in the next 12 months, the investment industry need to increase their capability and capacity on ESG to meet investors' needs.
With 56% of trustees taking some form of action, we can see regulation is having an effect and driving activity
for pension schemes.
prefer quarterly
input from advisers
41%
would like advisers to raise issues as they arise
31%
want a biannual
update from advisers
18%
want an update
once a year
9%
would like to receive a monthly update
1%
Our data indicates a prevalence of investors saying they look to their advisers’ recommendation.
Which issues would be most concerning?
69%
7%
plan engaging an adviser to support the work as a project
26%
will use a combination
of in-house resource and external adviser support
62%
will look to their existing advisers to help them work through TCFD
5%
plan to undertake the work entirely in-house
Strategy
Investors say they need help with all aspects of climate governance and disclosures in line with the Taskforce on Climate-related Financial Disclosures (TCFD)
Risk
management
Strategy and scenario analysis
Targets
and metrics
Governance
No
support
• 40% are beginning their ESG and sustainable investing journey and have some holdings that members may not be comfortable with
• 15% have an employer who has concerns that investments may not align with company values and image or are otherwise looking to collaborate with their employer and align with their policies
• 13% said some form of reputation risk like perception that trustees are not doing enough, they are seen as not moving fast enough, and where there is a risk of some inconsistency between what is written down (Statement of Investment Principles etc) and what is done in practice.
concerned
Are investors concerned with potential public, member or sponsoring employer criticism of their investments?
67%
• 20% have strong ESG policies, act on them and communicate these policies and actions to members / policyholders
• 5% said it is not a matter for members or policyholders where funds are invested
• 9% gave other reasons, saying this was not high on their agenda, with a few citing proportionality and small scheme size.
not concerned
33%
49%
No plans to gather views
25%
Plan to put a policy in place in next 12 months
26%
Policy in place to consider views
Do investors take into account the views of members / policyholders and beneficiaries when making investment decisions?
Many investors are at the start of their journey and some are concerned they may be seen as acting too slowly, that they have limited influence in pooled funds and that their members may have divergent views on how to approach ESG. One cited concern with external pressure groups and lobbying firms looking to create headlines. Some have investments are in pooled funds, so decisions on ESG matters are at arms' length and the concern is that trustees are not seen to be taking appropriate action. Other investors have no direct investments so depend on the stated ESG policies from asset managers.
Positively, 20% of investors are confident in the strength of their ESG policies and commitments and are communicating these to members so do not expect any criticism for their approach.
Investment scrutiny
Some found divergent views from members; some think trustees are going too far, some not far enough, while others felt members may have different views as to how environmental and social issues are most effectively addressed by institutional investors (e.g. preference for divestment). It’s interesting to see only 5% consider that it is not a matter for members and policyholders where funds are invested. This view is probably outdated, With the UK Stewardship Code 2020 setting the standard of good practice for investors expecting under Principle 6 for those investing money on behalf of UK savers and pensioners to ‘take account of beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them’ it is useful to see so few investors taking an opposing view.
Since the beginning of 2021, investors have been taking social issues into consideration with their investments.
In fact, a percentage already make investments that intentionally generate measurable positive social
and/or environmental outcomes.
Impact investing
63 %
are considering social issues
have plans to consider or review social issues
29%
Areas targeted for impact investment include
Climate change, carbon emission reduction
Biodiversity
Infrastructure
Renewable
energy
Affordable/
social housing
Education
Workers'
rights
Equality,
diversity
and inclusion
Recycling
11% of investors already make investments that intentionally generate measurable positive social and/or environmental outcomes and an additional 39% are considering impact investing.
[Trustees can] feel that a proportionate approach for a modest scheme is for them to follow the herd, rather than lead the way.
8%
No plans to discuss or change investment policies on social issues
29%
Not yet discussed social factors but plan to do so
33%
Beginning to consider their beliefs on social issues
14%
Updated policies, changes planned but not yet implemented
15%
Updated policies and made changes to their investments
8%
Cost too much at present
8%
Already priced into the markets
15%
Alignment not possible at current time
69%
Value judgement and need to seek risk-adjusted returns
Disagree
Disagree
42%
Achieving net zero aligns with fiduciary responsibility
88%
Good way to manage risks and look for opportunities
Agree
Agree
Disagree
16%
Agree
84%
We asked investors should they be looking to align portfolios with the Paris Agreement as the UK transitions to a low carbon economy?
Sarah Breeden, Executive Director, Bank of England
Delivering a path to net zero requires all of us to take necessary steps – governments and business, investors and individuals, as well as central banks and financial regulators.
27%
2040
60%
2050
What are your net zero goals?
In our experience, the sponsors of virtually all pension schemes recognise sustainability has financial consequences and we are also seeing trustees recognise this. Whilst smaller schemes may be taking steps to reduce their emissions many are waiting to see what trends emerge on target setting from larger schemes before making their own commitments.
We think it is important to recognise the developing nature of climate science and with it the developing nature of what is needed for target setting.
Since the UK government declared a climate emergency and became the first major economy to commit to reduce emissions to net zero by 2050, climate change and sustainability are rising on many agendas. We are seeing more and more net zero commitments from companies, cities, countries, organisations and from
some investors as well. Most investors matched the UK government’s own 2050 target, although some have set more ambitious goals.
Net zero commitments
have no clear understanding of what net zero means
36%
considering making
a commitment to
net zero target
26%
are not considering
targetting net zero
20%
of investors have a
net zero target in place
19%
Are pension trustees considering pension consolidation?
(e.g. transferring members to a DC master trust, buying out DB benefits with an insurer or transferring to a DB master trust or superfund)
Despite the DWP and TPR continuing to push for further scheme consolidation, there are only a few actively considering this route.
While there are 24% of trustees considering or actively consolidating their pension scheme, only 5% of trustees said concerns about sustainability and ESG are driving their decision to consolidate
into a larger vehicle.
For many schemes consolidation presents genuine challenges, particularly for smaller schemes where lack of resource and cost
are more of an issue. Very small schemes (including AVC arrangements) also face the biggest challenge in obtaining competitive terms despite standing to benefit the most.
Our experience shows medium to large schemes are more likely
to be considering consolidation.
Considering consolidating the scheme into a larger vehicle
19%
No plans to consolidate the scheme
76%
Actively working to consolidate the scheme into a larger vehicle within the next 12-24 months
5%
Summary of participants
We received input from 82 pension trustees and 9 other asset owners
Professional pension scheme trustees working for a trustee firm or company
45%
Professional pension
scheme trustees who work independently of a firm
9%
Member-nominated pension scheme trustees
20%
Employer appointed pension scheme trustees
13%
Asset owners, their employees and advisers, and in-house investment professionals working for asset owners or pension schemes
18%
Assets range from under £20m to more than £5bn
Number of members for those running pension schemes
Under
£20m
£20m
to £49m
£50m
to £99m
£100m
to £249m
£250m
to £499m
£500m
to £999m
£1 to £5bn
Over £5bn
5%
10%
15%
20%
12%
20%
12%
8%
20%
14%
12%
2%
100-999 members
32%
1000-4999 members
31%
More than 5000 members
31%
Fewer than 100 members
4%
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Investors expect advisers to bring current themes to them as part of discussions, like climate change and social issues
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There is clearly a need for upskilling of investment consultants to bring ESG risks and opportunities to the table and help investors navigate these issues.
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Helping shape
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7%
2035
7%
2038
Our sustainability leads
Scott Eason
Amanda Latham
Lead Sustainability Partner
Sustainability Policy Lead
Alex Pocock
Management Board Sustainability Sponsor
Michelle Robertson
Sustainable Operations Lead
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87%
49%
47%
41%
32%
27%
25%
22%
20%
15%
14%
5%
41%
31%
18%
9%
1%
36%
26%
20%
19%
45%
9%
20%
13%
18%
Setting targets and selecting metrics
63%
Applying governance
to evaluate issues
54%
Adopt processes to identify, assess and manage risks
49%
Confident to undertake full TCFD framework without specialist support or advice
15%
Strategy and scenario analysis
69%
Setting targets and
selecting metrics
63%
Applying governance to evaluate issues
54%
Adopt processes to identify, assess and manage risks
49%
Confident to undertake full TCFD framework without specialist support or advice
15%
