Unlocking the path to sustainable investment for UK DC Pension Schemes 

Mercer has developed RITE to help asset owners (including DC pension schemes) to assess how well they are integrating sustainable investment into their overall decision-making. RITE assesses asset owners based on 75 sustainable investment data points across 21 categories. By scoring asset owners on a scale of C to A++ (with A++ being the highest score), RITE’s approach is easy to follow and cuts through the complexity that has built up around sustainable investment. RITE demonstrates how asset owners rank against their peers and helps identify specific actions and interventions, with progress monitored over time on an annual basis.

Our initial RITE report from 2021 showed that many DC schemes had made little progress in integrating sustainable investment into their decision-making. In that year, RITE awarded 46% of DC trust-based schemes a score of C or C+ and only 8% scored A or better. Fast-forward to 2023 and we can see clear progress. The proportion of DC trust-based schemes scoring C or C+ has fallen to 32% and schemes ranked A or better has risen to 26%. A comparison of how DC trust-based schemes scored in 2021 compared to 2023 is illustrated below.

Though some DC schemes are on the path to better sustainable investment integration, the industry in general is playing catch-up with rapid changes in regulation and many other pressures. Of the schemes in a position to take action, some have achieved a great deal, however, there is still much to do for many schemes. RITE’s tailored interventions can help DC schemes to enhance their sustainable investment integration.

1. Establishing sustainable investment beliefs is typically the first step for schemes looking to enhance their sustainable investment integration and guides the subsequent actions.
2. There remains a disconnect between companies’ often-ambitious sustainability policies and those of their DC pension schemes. Schemes and companies should consider whether to close this gap. 
3. Implementing policies by updating and improving processes can have a major impact, have you looked at the carbon footprint of your scheme’s assets? 
4. Schemes are increasingly including a “sustainable” equity fund within their default investment strategy portfolio. The rise in the use of low cost passive equity funds that seek to maximise their exposure to positive sustainability factors and/or minimise their carbon exposure is certainly a step in the right direction but they should not be seen as a single “catch-all” solution to addressing sustainability issues including climate change. Have you considered sustainable investment fund options outside of passive equities, possibly impacts funds or within the illiquid asset space?