New guide advises asset owners on how to integrate preferences into investment decision making.
Asset owners seek to increasingly shift their investments in line with the sustainability preferences of their beneficiaries, the Principles for Responsible Investment (PRI) has said.
The UK’s Environment Agency Pension Fund is the latest pension fund to have announced a net zero plan.
Marion Maloney, Policy, Governance and Risk Manager at Environment Agency Pension Fund, commented: “92% of members who took part in one engagement event wanted the fund to have a net zero target. After members told us this, we spent nine months analysing environmental, financial and legal data. And we are delighted to have just launched an ambitious plan to get to net zero by 2045.”
The PRI has released a guide for asset owners on how to implement beneficiaries’ sustainability interests into investment strategies to support asset owners seeking to adapt to the preferences of beneficiaries.
This adaptation is driven by reasons such as an evolving regulatory landscape, an increased acknowledgment among asset owners that investments should reflect the values of their beneficiaries, and increased realisation of the benefits.
The PRI’s CEO Fiona Reynolds said: “Although asset owners in most jurisdictions are not legally required to incorporate the preferences of beneficiaries into their decision-making, many do, as factoring in beneficiary views is both important and necessary.
“All pension funds should have an understanding of their beneficiaries’ views on how they want their money to be managed.”
The PRI and UNEP FI have worked over years to clarify investor obligations and fiduciary duties, and released its findings in a report.
Benefits for asset owners, who align to beneficiaries’ preferences, include increased competitiveness, improved beneficiary satisfaction and increased contributions, as awareness among beneficiaries of the role and power their savings play in the world grows, the guide said.
“It is therefore paramount that investors understand beneficiaries’ interests and place them at the centre of investment decision-making,” the guide noted.
It named developments in the EU, UK and Japan as examples indicating how greater consideration of beneficiaries’ preferences will likely be a focus of sustainable finance policy.
Emmet McNamee, Senior Policy Analyst at the PRI, and Toby Belsom, Director Investment Practices at the PRI, said: “Regulation is a key driver of the uptick in asset owners seeking [to align to] the sustainability preferences of their beneficiaries, and regulations in the EU and the UK have been more explicitly encouraging to understand and align with those preferences.
“In particular, draft provisions of MiFID II, Solvency II and the Insurance Distribution Directive in the EU are likely to accelerate the consideration of individual savers’ preferences in investment decisions.”
Within the EU, the European Securities and Markets Authority currently considers it would be “good practice” for investment firms to collect information on clients’ ESG preferences.
Depending on the beneficiary preferences, there are numerous options how asset owners can respond.
Where beneficiary preferences are substantially aligned on certain issues, the asset owner should use this information to develop a default investment option, the guide said.
Where beneficiaries strongly express ethical or sustainability concerns, this may give asset owners a basis to exclude, divest or alter sector weightings.
Where there is no or limited consensus among beneficiaries, preferences may be fulfilled through provision of fund options or products.
McNamee and Belsom explained also that asset owners of certain regions, such as Denmark, Canada, South Africa, parts of Latin America and Australia, may be well placed to lead with their alignment of investments. This is due to the ways in which the pension funds are governed and already include beneficiaries in their investment-decision making.
In February, an Australian legal opinion warned that pension funds must act in the best financial interests of a beneficiary and be responsive to the financial risks posed by climate change.
Joanne Etherton, Climate Finance Lead at environmental charity ClientEarth, commented: “This opinion emphasises that the scale and breadth of some of the impacts of climate change are so profound that risk may not be diversifiable. As a result, divestment or reallocation of assets may be required.
“This is not just an Australian issue – it is a global one. While the systems and laws might vary, the fundamentals are the same: pension schemes must immediately take a robust stance on climate change to protect savers’ pensions from the very worst effects of climate change, and to avoid legal challenge.”
Reynolds said: “All asset owners have a real opportunity to improve the satisfaction and engagement of their beneficiaries by aligning investment practices with beneficiary preferences, thereby cultivating valuable dialogue and loyalty.”
The PRI proposes a four-step process for asset owners to understand and integrate beneficiary preferences.
These include to define engagement objectives; engage beneficiaries; integrate relevant beneficiary preferences into investment decision-making (allocation, stewardship, policy); and report back to beneficiaries.
To inform the guide, the PRI surveyed 14 of its signatories.