Sonia Kataora: DC providers are holding firm and sticking to their guns on sustainability
Defined contribution (DC) schemes are increasing allocations to funds with climate targets, against anti-ESG expression, Barnett Waddingham research shows.
The consultancy's research – Sustainable Investment in 2024 – found there had been a 34% increase in allocations to funds with a climate target in the growth stage since Barnett Waddingham published its original DC sustainability report in 2021.
Despite this, it said that providers had, on average, 35% of DC scheme growth assets exposed to investment managers who had exited climate collaboration initiatives.
Barnett Waddingham noted that BlackRock, Vanguard, State Street and Northern Trust had all recently stepped away from the Net Zero Asset Managers (NZAM) initiative and Climate Action 100+ (CA100+) – adding the total assets under management of these firms alone stands at $25trn (£18.4trn).
It said these exits were part of a broader trend – noting that 71 investors have left CA100+ since June 2023, an exodus it said has been triggered by growing anti-sustainability sentiment, particularly in the US, where asset managers have been accused of overstepping their fiduciary duties, accusations that have led to legal action by 11 US states.
Barnett Waddingham said many managers have justified their exits by claiming to manage climate risks independently and in a manner supporting stewardship and sustainable investing.
DC scheme reactions
Barnett Waddingham's research showed there was a clear trend among DC scheme providers to embed carbon emission reductions into their default strategies.
It said this shift has gained momentum over the past four years – demonstrating "tangible progress" in aligning portfolios with global targets.
Source: Barnett Waddingham
Barnett Waddingham said this comes as many providers are asserting their role as stewards of capital – pointing towards examples such as a recent investor coalition led by The People's Pension, which called on managers to develop robust stewardship strategies.
Moving forward
Barnett Waddingham said that, where DC providers back ESG, but investment managers do not, the industry "must find a way forward" to achieve best member outcomes.
The firm called on the industry to "embrace complexity" when it comes to ESG. It noted that high scores in leaderboards do not necessarily equate to providers driving meaningful change, while lower scoring schemes aren't always failing their members on climate initiatives.
It said 15 strategies researched by Barnett Waddingham have net zero by 2050 targets, three target 2040 and two are without a target. The firm noted, however, that the United Nations has warned the chance of achieving a global net-zero target by 2050 is now "virtually zero".
Barnett Waddingham said this reality meant DC providers face trade-offs and cannot blindly reduce emissions. It said they must regularly reassess their net zero targets to manage unintended financial risks and not be afraid to recalibrate targets if needed.
For those DC providers facing a difference in opinion with their investment managers, Barnett Waddingham called on providers to improve monitoring, take more control of voting and take an active role in reviewing manager decisions and initiatives.
Barnett Waddingham partner and head of DC investment Sonia Kataora commented: "Despite the winds of change blowing in a new direction, DC providers are holding firm and sticking to their guns on sustainability. This is critical if they are to uphold their roles as stewards of capital, achieving the best outcomes for members financially.
"It is certainly a tumultuous time, both in terms of the global anti-ESG backlash and the seismic changes to policy and structure of pensions coming from the upper echelons of the UK Government. Those pushing for minimum size thresholds for DC providers must remember that scale alone does not guarantee sophistication."
She added: "Of course, scale can amplify impact. Larger providers can wield significant influence by directing capital away from underperforming managers, and they have a unique position to push for stronger stewardship and set higher standards for responsible investment. But smaller schemes can also use their powers effectively, focusing their resources on the things that really matter to their members and collaborating to impact policy; some of the leaders of the pack on good ESG are smaller schemes."
