Schroders says three UK DC plans commit £350m to sustainability fund as their scheme ‘default’ option

DWP guidance appears to have prompted trustee attention to ESG default potential.

Schroders, the £447bn London-based fund manager, says three UK defined contribution (DC) schemes have committed £350m (€400m) to a new factor-based sustainability fund it has launched, and importantly will be using the fund as the ‘default’ option for scheme members’ pension saving, according to Tim Horne, Head of UK Institutional DC at the firm.
Horne described the choice of a sustainability fund as the default by the schemes as a “big deal” and said it marks a move away from the use of purely market capital based passive equities strategies by DC schemes. Studies regularly show that a majority of pension savers in DC plans remain in the default fund option. It would mark a significant uptick in the volume of sustainability assets if the same approach was adopted by other plans. The Schroders Sustainable Multi-Factor Equity (SMFE) fund assesses companies on quality, value, momentum, volatility and sustainability factors.
Recent guidance from the UK’s Department of Work and Pensions (DWP) appears to be increasingly concentrates trustees’ minds on ESG issues.
Last month, the DWP confirmed that it will update regulation around fiduciary duty to clarify that trustees must consider financially material ESG risks and opportunities – which includes how DC schemes are considering it in their default strategies.
Schroders’ launch follows in the footsteps of UK fund manager Legal & General, who in 2016 launched its Future World Fund, a multi-factor global equities fund that included a climate tilt, which was adopted by the £1.85bn (€2.1bn) UK pension scheme of HSBC Bank as its default option, a landmark move at the time.RI reported this earlier this year that the Future World Fund had grown to £4.63bn (€5.3bn). Schroders’ new sustainable multi-factor strategy uses its proprietary tool, SustainEx, to assesses more than 9000 companies based on academic research rather than relying on third-party ESG ratings. Jessica Ground, Global Head of Stewardship said that third party ESG ratings were too often too “backward looking” and didn’t work “in investment terms for this fund”. The SustainEx framework, Schroders says, enables it to put a number on the societal benefits that the fund creates through its investment in companies with better sustainability practices, such as paying fair taxes and wages. Based on a study of the strategy from 2010, the £447bn UK listed asset manager claims that its new fund would generate approximately £2.50 of net external societal benefits for every £100 of revenue.
Companies in involved in sectors such as tobacco, gambling, and weapons manufacturing are excluded by the new fund, which uses “sensible but minimal screens”, according to Ashley Lester, Head of Multi-Asset Research and Systematic Investments.
Lester said that the new fund, which rebalances every month, cuts the carbon footprint under a scope 1 emissions by 50% compared to its benchmark, the MSCI All Country World Index.
A global version of the Schroders fund has been scheduled for launch in December.