NEST Champions Responsible Investing Among UK Pensions

(March 31, 2011) — The National Employment Savings Trust (NEST), a defined-contribution pension scheme for UK workers who do not have access to a company pension provided by their employer, has upped its standard of responsible investing, drawing further attention to environmental, social and governance (ESG) principles.

The decision follows NEST’s outline of its investment approach, in which it explained it would encourage companies to better align their interests with shareholders on ESG factors.

“NEST Corporation believes that exercising care does not stop once an investment has been made,” the group said in a statement. “Continuing to exercise care once investments are made marks progress towards meeting voluntary standards of good practice on stewardship, and may also improve risk, expected return, and the quality of the businesses and market-places in which NEST invests. NEST Corporation refers to this activity as responsible ownership. NEST Corporation also believes that good ESG data will improve overall investment performance.”

NEST’s move illustrates the increased motivation by pensions to adhere to ESG guidelines. A recent report encouraging the adoption of ESG principles is a study from Mercer — titled Climate Change Scenarios – Implications for Strategic Asset Allocation — which asserted that institutional investors could lose trillions of dollars over the coming decades as a result of “continued delay in climate change policy action and lack of international coordination.” Opportunities, the report said, lie in an increased allocation to infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets, with investment opportunities in low carbon technology reaching up to $5 trillion by 2030.

Last year, UKSIF, a UK-based sustainable investment and finance association, issued a report that said that over the next 10 years, it expected responsible ownership and investment to become the norm for major occupational pension schemes. The group said that norm would be reflected by an increase in sustainability governance, with it becoming good practice to have at least one trustee with sustainability expertise. Additionally, the group predicted a move toward greater online disclosure of how responsible investment strategies are implemented.

“We are fast approaching a tipping point when responsible investment will become the norm for major investors worldwide,” said UKSIF Chief Executive Penny Shepherd in June. “However, this will require commitment from governments, asset owners and civil society. It is clear that there is growing awareness and concern about where investment is made and its consequences. You only have to look at the current situation in the Mexican Gulf to see the potential environmental risks and the pressure for change.”

In stark comparison to the UK, the US has been less willing to embrace ESG. There have been some bright spots, however. In November, the California Public Employees Retirement System (CalPERS) issued a report describing its aims to invest $500 million in a ‘green’ portfolio in an effort to limit greenhouse-gas emissions and improve the environment. The investment was in addition to about $2 billion CalPERS had committed to green-related investments in the past four years. “Research shows that a positive inclusionary methodology for investing in common stock companies is more successful than a negative exclusionary approach that uses subjective rather than quantitative selection criteria,” George Diehr, CalPERS investment committee chairman, said in a statement.