UK’s NEST workplace scheme taps Northern Trust for emerging markets ESG index fund

HSBC also recruited following tender launched last year

NEST, the new low-cost UK defined contribution workplace pension scheme, has today (July 9) announced that the Northern Trust Emerging Markets Custom ESG Equity Index Fund will be part of its suite of investments.

Responsible Investor reported in November that NEST, the National Employees Savings Trust, was looking to procure two emerging market funds to use as building blocks in its default retirement date funds and in other fund choices as “appropriate”.

The £48.6m (€61.1m) Northern Trust offering uses a bespoke ESG screening approach developed with index and ESG information provider MSCI and its recently sold ISS (Institutional Shareholder Services) governance arm.

Mamadou-Abou Sarr, senior vice president and senior equity strategist at Northern Trust Asset Management, discussed it on a panel at the RI Europe conference last month. He explained the firm’s project with ISS to look at the ownership structures of emerging markets companies, focusing on those that are quasi-government/family owned and at those which have issues around board composition/independence. This led to an exclusion list (“the worst of the worst”) and the custom index product with MSCI.

The fund invests in around 740 stocks in emerging market countries and is managed in the same way asthe standard market cap-weighted £124m Northern Trust Emerging Markets Index Fund. It excludes around 80 stocks. Speaking on the same panel, NEST’s Investment Advisor Paul Cox explained how it uses pooled funds in an “unusual marriage” of index investment style and an “explicit organisational belief” in ESG.

As well as the Northern Trust fund, NEST has also awarded a mandate to the HSBC Global Investment Funds (GIF) Economic Scale Index GEM Equity Fund. It comes as Credit Suisse released research that emerging capital markets are expected to double their global index share by 2030 – with China overtaking the UK and Japan to become the world’s second largest equity market.

Mark Fawcett, NEST’s chief investment officer, said: “This is our first exposure to alternative indexing and reflects two of NEST’s investment beliefs that both indexed management, where available, is generally more efficient than active management and that integrating valuation considerations into the investment process can enhance our long-term performance.”
In 2011, NEST, which is committed to integrating ESG across all asset classes where practical, awarded mandates for its Ethical Fund and Sharia Compliant Fund to F&C Global Asset Management and HSBC Global Asset Management respectively.