NZI DC Forum: funding the transition

The event was kicked off by chair Nico Aspinall, sustainability advocate at Newton Investment Management, who highlighted the scale of the climate crisis. With Oceans warming at a much faster rate than previously anticipated, the drastic impact of global warming will be felt within this decade, Aspinall warned.

But Aspinall also highlighted that our ability to respond to these challenges is accelerated by series of positive tipping points such as the stark acceleration of investment in battery capacity which will help drive up the pace of the energy transition.

Mark Hill, climate and sustainability lead at the UK’s Pensions Regulator (TPR) followed up by outlining how trustees could put these challenges into practice. He made the case that in principle, DC investors with their relatively longer-term investment horizon should be best placed to tackle the energy transition.

Outlining the regulator's priorities for the year, Hill highlighted the opportunity to take stock of the first founds of TCFD reports and to examine the role of transition plans in putting net zero into action.

Mansion House- feed the unicorn?

The first panel session of the day jumped straight to one of the defining investment challenges for DC investors this year, the potential impact of the Mansion House reforms.

The changes, announced by the UK chancellor last year came with a pledge by nine of the UK’s largest master trusts to invest at least 5% of their assets in private markets. Paul Tinslay, professional trustee at Dalriada, Mike Weston, independent trustee at Pi Partnerships and Anastasia Guha, global head of sustainable investments at Redington took stock of the potential impact of these ambitions.

Tinslay opened the debate by describing Mansion House as potential ‘unicorn food’, which could accelerate the take-up of successful start up listings in the UK.

But Weston argued that there was a need for further policy clarity. Speaking from his experience in the Local Government Pension Scheme (LGPS), he warned that lack of a clear policy agenda had been a key challenge for the LGPS and the government was at risk of repeating these mistakes with DC pension funds.

Rather than getting individual pension funds to pledge voluntary allocations to private markets, the government should be upfront about its agenda, Weston argued. “If this is about mandating then politicians and regulators should be honest enough to actually come out and mandate,” he argued.

In contrast, Guha argued that regulation had already been a key driver to bringing climate change to top of investors' agendas. She cautioned against the government taking an overly prescriptive stance on asset allocation.

At the same time, she also welcomed that the challenging macroeconomic environment meant that more complex asset allocation debates were finally taking place at DC level, with trustees now seeing the case for greater diversification.

Tinslay concluded that while the Mansion House reforms are not directly linked to net zero, there was nevertheless a clear connection with private markets taking a crucial place in the energy transition: “Let’s use the momentum and help direct the future of travel,” he stressed.

Tackling the black box of index investing

Vincent Denoiseux head of investment strategy at Amundi, kicked off the panel discussion on the future on index-based net zero reporting. He highlighted that the evolution of carbon data and indices has increased rapidly over the last ten years, with the EU taxonomy being the latest “great addition”.

Adding to this point, James Monk, workplace investment director at Fidelity International, outlined that there is a “proliferation” of indices in the sector, and with this comes a growing need for providers to be clearer with “what is in the black box”.

The discussion then turned to indices surrounding emerging markets and how DC funds can manage issues of data quality and transparency in the space.

Monk, who works on the Fidelity master trusts’ Futurewise strategy, argued that when approaching emerging markets, DC funds should take more of an “actively managed approach”. He detailed that this entails engagement with the market and a lot more thinking around whether you “trust” the data.

Coming off Monk’s points, Callum Stewart, head of investment proposition distribution at Standard Life, noted that governance quality is a “good indicator” when it comes to investing in emerging markets.

Currently, the DC fund invests in emerging markets’ debt on an active basis and automatically screens out companies with little data, taking a more “considered approach” towards commitments, Stewart added. 

LTAF's: new entry points

As DC investors are increasingly branching out into private markets, a key vehicle to make alternatives accessible will be  Long-Term Asset Funds (LTAFs), a new open-ended investment structure aimed at making illiquid assets relatively more accessible to DC funds. 

Tim Horne, head of UK institutional defined contribution at Schroders, started off the panel on LTAFs by highlighting the “significant role” that they could play in allowing DC schemes to meet their net zero goals. For example, allowing them access to invest in the production of renewable energy, he explained.

Joanna Sharples, chief investment officer, DC solutions at AON, added that the area is “hugely positive” for DC schemes. However, she stated that access to private assets is in its “infancy”, so it may take a few years for the industry to gain benefits from the area.

However, on the more pessimistic side, Gerald Wellesley, professional trustee at Vidett, drew delegates’ attention to the challenges of investing in private markets. He highlighted that asset classes such as private equity and debt do not have a “great track record of being climate aware and net zero reporting”, which makes it difficult to access schemes' climate impact.

Jonathan Lawlor, senior consultant at Investment XPS Pensions Group, added that there is a lot of nervousness around private assets in the DC space.

There is also scepticism about whether investment in the space could meet “headwinds” due to the future DC consolidation, which could see some schemes running several private assets platforms.

However, ending on a more optimistic note, all four panellists agreed that LTAFs are an interesting asset class for DC schemes, with greater investment into private markets expected over the next three years.”

Fiduciary duty -the bigger picture

On the last panel discussion of the day, Paul Lee, head of stewardship and sustainable investment strategy at Redington, Will Martindale, co-founder of Canbury, and David Russell, chair of the Transition Pathway Initiative, got together to discuss fiduciary duty in a net zero context.

Lee highlighted that one of the main issues impacting the conflict between fiduciary duty and net zero is that “not every” lawyer who is advising pension schemes is reflecting the messages of climate risk that the industry has been hearing for decades.

This in turn is leaving “trustees feeling tied to what the law is telling them”, Lee continued.

 Martindale highlighted that there are three routes for trustees to advocate for sustainable investment: regulation, case law and shifting the “normative interpretation of what we consider to be responsible, sustainable investment within the grounds of fiduciary duty”.

The third route being the “most important”, Lee argued. Russell countered that he believes the shift is “already happening” and it was largely initiated by the Paris Agreement.

“There has been a shift from where we were 22 years ago talking about climate change to post the Paris Agreement. This event has stimulated a lot of thinking and change around how pension schemes and trustees are looking at climate change and the broader range of environmental, social and governance issues,” Russell concluded.