UK building society Nationwide may switch its defined benefit pension scheme’s Asia-heavy £975 million ($1.26 billion) listed equity allocation to an environmental, social and governance (ESG) benchmark.

“Over the next few months we will talk to the trustees about whether we should tilt the portfolio away from a market cap weighting to an ESG-focused index, and we are reviewing various benchmarks,” Mark Hedges, chief investment officer of the £6.5 billion fund, told AsianInvestor.

Nationwide Pension Fund’s listed stock portfolio is passively managed and benchmarked to index provider MSCI's All-Country World and emerging market indices. The scheme had switched all of its public equity exposure to passive management five years ago following underperformance by its active strategies.

Mark Hedges

Hedges now wants to give the entire public equity exposure an ESG focus.

This comes as pressure is growing on pension plans globally – most notably in Europe and the UK – to take environmental and social considerations into account in their investment strategies. But in doing so, funds do not want to sacrifice performance.

“Switching to an ESG index would be an easy early step in this direction, but this needs to be aligned with the views of the trustees,” Hedges said. “They might have different views. You have still got to have the same sort of return [as under the current market cap weighting] to ensure that pensions are paid.”

ESG REQUIREMENTS RISING

But he highlighted the need to take action: “There’s going to be so much monitoring and reporting required around ESG; you will need to show what you are doing. However, ESG is more than just reporting and monitoring, and we recognise we have to invest in the right assets in the right way as a pension fund.”

Nationwide Pension already has a responsible investment policy. It has, for instance, invested in renewable energy in Asia, Hedges said. “So we have been doing things in this area, but it’s probably not been explicit enough.”

Increased reporting will be required under the UK’s Stewardship Code from 2021 and Task Force on Climate-related Financial Disclosures (TCFD) from 2022, he pointed out. The aim of the TCFD, set up by the Basel-based Financial Stability Board, is to improve and increase reporting of climate-related financial information.

Moreover, ShareAction, a UK charity focused on responsible investment, just last Thursday (November 5) proposed a bill to British members of parliament. The legislation would strengthen the legal duties of fiduciary investors – mainly pension trustees and their asset managers – to act in the best interests of their beneficiaries, by stipulating in law that ‘best interests’ include environmental and social considerations.

Europe and the UK are ahead of Asia Pacific in this area of regulation. Even in Australia, arguably the most mature retirement market in the region, investment managers such as pension fund trustees are not yet legally required to consider ESG factors in their investment decision-making as part of their fiduciary duties, wrote law firm MinterEllison in a September note.

ACTIVE EQUITY UNDERPERFORMANCE

Asked for more detail about Nationwide Pension’s 2014 decision to move from active to passive exposure to listed stocks, Hedges said that only two out of its 13 active equity managers had beaten the market over five years.

“[So] we considered splitting the passive allocation into three parts: one-third market cap-weighted, one-third smart beta/factor-based strategies and one-third held synthetically via total return swaps and futures, so we could free up some cash for de-risking.”

Following discussions with the trustees and given that the scheme’s exposure to public equities was falling, he said, the decision was made to split the portfolio 70% physical and 30% synthetic in market cap.

As it moves to de-risk its portfolio further, Nationwide Pension is now putting more focus on private credit assets as a driver of returns. Hedges expects the fund to make its first investment into such strategies in Asia at some point.