In the first of this three-part series, we challenge common misconceptions that have led to the increased prevalence of passive investments in defined contribution (DC) schemes.
To help trustees and corporate advisors weigh the pros and cons of active management, we perform a reality check on each misconception, referencing fiduciary principles and market and member survey data.
This installment addresses the misconception that sustainability is incompatible with superior investment returns.
Misconception: Sustainability is incompatible with superior investment returns.
Reality: An integrated approach, rooted in materiality, can potentially deliver on both returns and sustainability over the long term.
Sustainable, or environmental, social, and governance (ESG), investing is an important issue for DC schemes. However, the availability of sustainable investments and methods of implementation vary significantly by country. Sustainable investing has been around longer and is more common in the United Kingdom and Australia while plan sponsors in Canada and the United States are generally in the early stages of incorporating sustainable investments into the DC plan menu. Regulatory regimes in each country have had a lot to do with whether or not sustainable investing is incorporated.
A compledx and evolving regulatory backdrop
With the UK Stewardship Code now in full effect and the UK committed to adopting the Taskforce for Climate-Related Financial Disclosures (TCFD), pension schemes will need to evolve to meet expectations regarding their governance, strategy, reporting and member engagement. In addition, the UK and European Union continue to push forward with important pieces of legislation likely to shape the discourse around sustainability. MFS is actively participating in that discourse as we help our clients navigate this complex and rapidly evolving field.
Regulation has driven the need for pension funds to integrate sustainability into their investment approach by documenting in their Statement of Investment Principles (SIP) how they take into account financially material considerations such as ESG issues, and it has required them to articulate their approach to stewardship by producing an implementation statement explaining how they have followed and acted on the investment policies outlined in their SIP. As an active manager, MFS has always sought to identify investments that can add sustainable, long-term value for our clients, and we have a history of both engaging productively with companies and other industry participants and of exercising our voting responsibility, thoughtfully and deliberately on ESG issues. During the 2020 calendar year, MFS was eligible to vote on 22,976 ballot items at 1,992 shareholder meetings across 60 markets, voting shares at approximately 99% of them.
The member appetite for sustainable investments
Despite varying regulations around the world, one voice that is consistently supportive of sustainable investing is that of the member.
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