The UK’s leading auto-enrolment pension fund is considering investing in a range of new asset classes, including commodities, infrastructure, global credit and private debt.

In its annual responsible investment report released yesterday, the National Employment Savings Trust (NEST) said it was researching the environmental, social and governance (ESG) risks for these asset classes before investment.

“We’re currently researching a range of new asset classes… Our goal is to improve our understanding of the types of issues prevalent in alternative asset classes such as commodities and infrastructure,” NEST said in the report.

“The more investors ask questions about ESG issues in alternative areas, the more fund managers will start to identify and address them as a routine part of their investment process,” it added.

Launched in 2012, NEST now has assets of £2bn (€2.2bn) under management, but is expected to grow to become one of UK’s largest asset owners over the next few years.

NEST said it was considering investing in commodities to diversify members’ portfolios, while it was looking at infrastructure investments to benefit from the illiquidity premium.

The scheme also said it was considering an allocation to impact investing strategies, and was examining how the market for specific impact funds developed. In particular, it said it wanted to “find out whether they’ll give pension schemes like ours more opportunities for improving the risk and return profile of our members’ portfolios”.

In addition, regarding its stewardship strategy, NEST said it had broadened the subset of companies it monitored closely to include more energy companies, tobacco companies, listed asset management companies and companies in emerging markets.

The scheme said it was also researching how institutional investors that are invested in global equity index funds could manage the risks of investing in the tobacco sector. Some major asset owners, such as the California Public Employees’ Retirement System and Norway’s Government Pension Fund Global, have reported that banning equity sectors such as tobacco on ethical grounds had caused them to miss out on significant investment returns over several years.

NEST has also excluded companies involved in manufacturing controversial weapons from its portfolios. The scheme said that it closely scrutinised managers’ approaches to managing ESG factors in their investment processes as part of its procurement process.

“By only selecting fund managers with strong ESG credentials or those who show a strong commitment to working with us to improve their approach, we can ensure that these risks are being taken seriously across our funds,” the scheme’s report said.

NEST was also actively involved in shareholder action against excessive pay, voting against executive pay proposals at Barclays and Shell. The scheme said it remained concerned about some elements of corporate pay, an issue it has been vocal about since it opened for contributions in 2013.

NEST CIO Mark Fawcett said: “Executive pay can’t be set in a vacuum. If pay is disproportionate, incentives are opaque or in some cases pay policies are being structured to get around the rules, these pose clear risks to long-term investors like our members.”

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