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Understanding investments’ sustainability performance to enable more sustainable investment choices

October 2018 – The concept note proposes a new approach that would help pension beneficiaries make better decisions regarding the sustainability performance of their pensions.

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Understanding InvestmentsAbout the report

The size of Defined Contribution (DC) pension markets globally is very large with amounts invested being more than USD 8 trillion dollars in 2016. DC schemes are occupational pension schemes where an individual’s own contributions and their employer's contributions are both invested and the proceeds used to buy a pension and/or other benefits at retirement. Pension beneficiaries in these markets are currently insufficiently able to make well-informed decisions regarding the sustainability performance of their pensions. This is problematic from a sustainability perspective. It is also problematic from the perspective of servicing individuals to achieve their aspirations on the future of themselves, people close to them and their environment. Given the size of the global markets, if a concept such as this were to be implemented effectively, the effects could be transformative.

The concept results from work carried out by a sub-team of the Banking Environment Initiative’s Fintech Taskforce, which was created at a Chief Executive summit convened by HRH The Prince of Wales in early 2017. The team worked on the concept over the course of 2017-2018 and consisted of colleagues from BNP Paribas, BNY Mellon, the University of Cambridge Institute for Sustainability Leadership (CISL), Legal & General Investment Management and PGGM.

This concept is aligned with the mission of the Banking Environment Initiative and falls in CISL’s focus areas of Positive Impact and Digital Finance. It should be of interest to fintech entrepreneurs, the markets units of banks, investment managers, pension funds, consultants, NGOs and government agencies who may have an interest in putting the concept into practice.

Findings & hypotheses

The concept note observes that Pension beneficiaries in DC pension schemes currently are insufficiently able to make well-informed decisions regarding the sustainability performance of their pensions. Based on industry experience and literature study, the note identifies three possible causes for the lack of beneficiaries’ agency:

  1. Sustainability performance opacity: relevant data based on broadly accepted standards on sustainability performance is largely unavailable to industry parties and private beneficiaries.
  2. One-sided communication focus: investment communications tend to predominantly focus on financial returns. They do not sufficiently provide understandable sustainability performance information, to the extent that such information is at all available. This is a wider sector issue that goes beyond the pension market.
  3. Pension apathy: beneficiaries largely do not engage with pension information that is available. This applies to both financial and non-financial information about pensions. 

The note then identifies four motives why this is a problem worth solving:

  • Major societal opportunities can be grasped
  • Major commercial opportunities can be grasped
  • The political and regulatory landscape is ripe for this type of market solution
  • Too few effective solutions are being offered to clients.

Building on these motives the concept defines three fundamental hypotheses that underpin the concept-solution:

  1. Improving information available allows pension beneficiaries to more consciously make investment decisions
  2. More conscious investment decisions will increase demand for investment opportunities with better sustainability performance
  3. Emerging technologies in the financial sector (fintech) could enable the above if such technologies were to be applied well. 

Proposed concept & next steps

Finally, the note proposes an investment solution that would easily enable pension members to choose the level of sustainability performance they wish to invest in. The concept entails a combination of the following:

  • A combined view of all pension accounts of an individual
  • Robo-advisory enabling personalised automated analysis and advisory
  • Much higher quality and quantity of sustainability data
  • Clarity on comparative financial performance
  • Real-time analysis
  • Granular assessments at facility level
  • A surpassing beyond current corporate reporting/ disclosure on sustainability

The concept note ends with recommendations on how to take this development further in the next phase of this project.

Citing this report

Please refer to this report as University of Cambridge Institute for Sustainability Leadership (CISL). (2018, October). Understanding Investments’ Sustainability Performance to Enable More Sustainable Investment Choices. Cambridge, UK: Cambridge Institute for Sustainability Leadership.

Published: October 2018

Disclaimer

The opinions expressed here are those of the authors and do not represent an official position of their companies, CISL, the wider University of Cambridge or clients.