Data constraints pushing NEST towards more expensive sustainability strategies, says CIO

On-going procurement revealed systematic integration of sustainability factors beyond emissions would be an ‘absolute nightmare’ for UK scheme.

NEST’s CIO has said that data constraints are preventing the £30 billion ($38 billion; €35 billion) UK pension scheme from “systematically” integrating broader sustainability considerations through index tilting, forcing it to pursue more expensive active strategies.  

At an event at London Stock Exchange Group (LSEG) on Monday, Elizabeth Fernando told attendees that the fund is currently seeking a strategy that will allow it to factor in sustainability themes such as natural capital and other social considerations into investments.

But she said that data constraints have prevented the scheme from integrating such factors systematically through portfolio tilting as it has done with climate change.  

“We came to the conclusion that we couldn’t implement that systematically because the data was simply not there to be able to do that consistently across geographies. We would have had to have different measures in different places. It would have been an absolute nightmare to implement,” Fernando said.  

As a result, the scheme is now searching for an active strategy, which will ramp up the costs. 

“I’m sure the people who do it are working extremely hard, and they deserve that payment, but if we had the data, we would have been able to adopt the same approach that we do for our climate-tilted strategies,” Fernando said.  

“That would have saved us a lot of money,” she continued, “and at the end of the day, that comes out of my members’ retirement pots… the sooner we have this information, the sooner it’s available consistently, the better for us”. 

Fernando was speaking at the launch of the International Sustainability Standards Board’s (ISSB) first two standards. ISSB has been tasked with developing a global baseline for corporate sustainability reporting and published its general and climate-focused standards on Monday. 

NEST holds most of its public equities through indexes, which have been tilted based on “emissions and other factors”, Fernando said.  

Referencing the ISSB, she added, “the fewer gaps we have in that information, the better… so the faster people can adopt this, the faster we can get Scope 3 properly into those disclosures so we can truly capture the impact of corporates”.

NEST was unable to provide details on the current procurement of an active strategy since it is ongoing. 

But a spokesperson for the fund told Responsible Investor that while there are still data challenges related to climate, there is a “single global goal that can be translated into sector-specific pathways and a consistent metric (emissions) that is not location-specific, which makes it possible to do systematic tilting”.

When it comes to other sustainability factors, such as natural capital and social ones, however, the spokesperson added, “we are not just missing the data…we also don’t have consensus on what the metrics and goals should be”.

“We’ve got enough data there that we can identify where the risks might be and which companies we should engage with, but at this stage not enough for systematic tilting.”