James Lawrence: ‘We disrupted DC pensions – now we’re disrupting our investments’
Smart Pension’s head of investment proposition tells Net Zero Investor about ESG investing, passive vs active management, carbon offsets and TCFD targets.
Workplace pension provider Smart Pension has reduced carbon emissions from its default fund by around 45% from a 2019 baseline, putting it ahead of schedule on its targets of halving emissions by 2025 and achieving net zero by 2040.
James Lawrence, Smart Pension’s head of investment proposition, tells Net Zero Investor that the 45% figure will be confirmed when the fund’s Taskforce on Climate-Related Financial Disclosures (TCFD) report is published in the next few weeks.
“It’s a strong performance so far and we’re on track to hit the net-zero targets,” says Lawrence, who will be speaking at Net Zero Investor’s Defined Contribution Forum on 31 January.
Smart Pension began life in 2014 as a UK-based auto-enrolment vehicle with a technology focus. It has subsequently become one of the fastest-growing financial technology companies in the UK, with increasingly global operations. Moreover, the master trust now has over one million members and more than £2.5bn in assets under management.
Smart Pension’s original focus was on technology, but it now also has a strong emphasis on environmental, social and governance (ESG) investing.
“ESG investing has always been part of the DNA to some extent, but we have really ramped it up over the past few years. And we see a lot of clients coming to us because of the ESG and sustainability characteristics that we can offer,” says Lawrence.
The master trust’s default fund is now 100% sustainable, up from 70% a year ago, and all the constituent funds that the master trust uses in its default growth fund are rated Article 8 or higher under the Sustainable Finance Disclosure Regulation.
“We were the disruptor of DC pensions to some extent, and now we’re trying to disrupt our investments as well,” he suggests.
“The default fund is 100% ESG tilted. And we have exclusions across the whole portfolio – so thermal coal, controversial weapons and UN Global Compact violators are all excluded.”
In October 2022, Smart Pension announced a partnership with AXA focusing on biodiversity. Then in December it announced that the master trust had invested £200m in Mirova’s green bond fund, with the intention of doubling this investment within two years.
Active vs passive
Smart Pension’s default fund has an unusually high level of active management, and it also claims to make “active decisions” with the passive element of the fund.
“I think we're probably at the top end of active management within the DC or the master trust in particular. So 23% of our default fund is active management. I think most defaults probably have nothing, or they have maybe 5%, 10%, maximum in active management,” says Lawrence.
So how can that be achieved and still keep costs under control?
“It's predominantly because we've built our own tech platform from scratch. Our admin cost and our platform cost are lower. So we've got more budget to spend elsewhere – and we spend it on investments,” he says.
“You have to have passive to some extent, but we want to be as smart and efficient as we can with that passive.”
Scale helps too, with Smart Pension offering technology services across the world. It has a million pension members globally, operates in Dubai, provides a technology platform to an Irish insurance company and has strategic partnerships in Australia and France.
Smart Pension is also committed to achieving the default fund’s ambitious net-zero targets through decarbonisation rather than carbon offsetting. So why take the harder road?
Lawrence says that offsets are a “distraction” from what Smart Pension is trying to achieve. He compares it to ‘Dry January’, with abstinence following excess.
“[With offsets] you can be polluting the world in one space, but then plant some trees elsewhere. And, technically, you're probably carbon neutral. But you should be trying to reduce your emissions full stop,” he says.
“I'm not saying there's not a place for offsets. I think they're useful. It’s just a bit distracting. It's like brushing it under the carpet. We want to just do it purely through our investments.”
James Lawrence is speaking at a session on “Greening default plans” at Net Zero Investor’s Defined Contribution Forum on 31 January at the London Stock Exchange.