HSBC UK pension scheme adopts climate 'tilted' fund as DC default

HSBC Bank UK Pension Scheme has chosen a new Legal & General Investment Management (LGIM) multi-factor fund with a climate change “tilt” as the equity default option for its £2.6bn (€3.1bn) defined contribution (DC) scheme.

The Future World Fund, unveiled today at an event at the London Stock Exchange, is a global equities index fund the HSBC pension scheme will transition to in January 2017, replacing its current passive global equities mandate that is already managed by LGIM.

The HSBC DC scheme had £1.6bn in funds under management in its global equities passive fund as at the end of June, although it is now worth around £1.85bn.

The Future World Fund tracks a new FTSE Russell index that combines smart beta, or factor investing, with climate-change parameters.

FTSE Russell is referring to it as a “smart sustainability” index; its full name is the FTSE All-World Ex CW Climate Balanced Factor Index.

Mark Makepeace, CEO of FTSE Russell, said that the new index “represents a new and exciting approach for the integration of ESG into passive investment strategies, and sets a new standard for DC funds”.

The new LGIM fund is the outcome of a process initiated by the HSBC pension fund late last year, according to Mark Thompson, CIO at HSBC Bank UK Pension Scheme.

Speaking to journalists earlier today, Thompson said he had communicated three main aims for a new global equities passive fund to LGIM – better risk-adjusted return, protection against climate change risks, and a more powerful ESG engagement policy within a passive mandate.

A statement about the Future World Fund launch said the HSBC Bank UK Pension Scheme was “one of the first schemes to adopt a multi-factor investment strategy incorporating a degree of climate-change protection as its default fund”.

Around 90% of HSBC’s DC scheme members go into the default strategy, although in value terms it represents 75% of the scheme, according to Thompson.

In a statement, he said: “This is a mainstream fund, the new normal.”

Asked if the pension fund had any plans to take a similar step for its defined benefit scheme, worth around £25bn, Thompson said environmental, social and governance (ESG) considerations were “at the heart” of the scheme overall and that the DB section already incorporated ESG-investing in various portfolios.

“Have we decided we’re going to change everything on the DB side to be the same as this? Not yet, but one step at a time,” he said.

“We have equity investments that are passively managed by LGIM on the DB side, but we haven’t made the decision on the DB side to make those changes yet.”

He said he wanted to start with the DC section.  

Targeting climate transition beneficiaries

The new FTSE Climate Balanced Factor Index is based on the FTSE All-World equities index, excluding its Controversial Weapons (CW) index, with the remaining index constituents’ weights then adjusted – or “tilted” – according to four of the five most recognised smart beta factors: value, quality, low volatility and size.

In a next step, three main climate change parameters are incorporated: carbon efficiency or emissions, fossil fuel reserves and green revenues.

These are designed, respectively, “to reduce exposure to companies with worse-than-average carbon emissions and fossil fuel assets, and increase[s] exposure to companies that generate revenue from low-carbon opportunities”, said LGIM in a statement.

Emma Douglas, head of DC at LGIM, said that the Futures World Fund is about “reallocating capital to the likely beneficiaries of the transition to the low-carbon economy”.

The Futures World Fund also incorporates a new engagement approach by LGIM, which provides for the new equity index fund to divest from companies that do not meet the asset manager’s minimum criteria after a certain engagement period.