How are ESG factors impacting pension engagement strategies?

Need to know:

  • Awareness of environmental, social and corporate governance (ESG) factors in pensions investment is increasing as regulatory requirements push it up the agenda.
  • Employers can align the ESG considerations in their pensions investment strategy with their own corporate and social responsibility (CSR) policies.
  • More employee education is needed to ensure they are fully aware of what ESG investing is, and the risks that come with any investment approach.

As public awareness of issues such as climate change becomes more acute, the impact of those organisations benefiting from pension fund investments is starting to be a key consideration for both employers and pension scheme members. With high-profile campaigns such as the Extinction Rebellion raising awareness of the issues present in everyday life, staff are asking what their employers can do to help.

Smart Pensions, in partnership with YouGov, conducted a survey in July 2018 which found that 40% of employees are willing to direct their pension providers to invest in organisations that demonstrate responsible and sustainable principles; that figure rises to 50% among those aged under 35.

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Environment, social and corporate governance (ESG) funds should also be on the radar for employers: from October 2019, the trustees of workplace pension schemes must update their scheme’s statement of investment principles (Sip) with details of how they take account of ESG factors, including climate change.

Lydia Fearn, head of defined contribution (DC) and financial wellbeing at Redington, says that ESG considerations are gaining traction: “It’s about taking the right sensible approach; it’s about integrating good investment policy into the investment strategy in a considered way, now and for the future. I think that’s what employees will be expecting of their pension scheme.”

Employer principles

Fearn notes that ESG investing can be a way of promoting an employer’s own corporate social responsibility (CSR) policies: “It’s a really easy way to tie [CSR] into the investment strategy, whether it’s a trust- or contract-based scheme; if an employee is working for that employer, and has bought into those principles and that belief, it makes sense that the investment strategy would reflect that.”

The Central Finance Board (CFB) of the Methodist Church, for example, specialises in ethical investing and offers its own 23 employees ethical funds through its group personal pension (GPP) with Aviva.

David Palmer, chief executive officer at the CFB, explains that finding a provider that could offer funds aligned with bible teachings and Christian policy was important: “At the heart of everything we do at this firm is Christian ethics; for example, don’t do harm to God’s world or God’s body, think carefully about the climate and about plastics, think about social welfare and the living wage.

“It’s ESG [factors] you would use in an ethical product, but we come at it from a Christian perspective.”

Before moving to the GPP in May 2019, the CFB asked employees how important ethical pension investments were to them. “If we didn’t have ethical investing, it would be an issue; it’s fundamental to how people think here. For the majority of our staff it’s definitely an important element,” Palmer explains.

Clear communication

The starting point for employers should be education, says Sarita Gosrani, head of ESG research at XPS Investment: “Investment in itself is daunting, but once they’ve grasped that, then you add in responsible investing, that’s another element to grasp. Education, simplicity and clarity about what ESG investing is, and what options are available to employees, is really important.”

Beyond just avoiding investing in harmful products like tobacco, ESG considerations include considering the behaviour and practices of the organisation benefiting from the investment.

“When we look at traditional financial balance sheet analysis, we’re not able to capture those risks that are inherent in a particular company that is being invested in,” Gosrani adds. “We want people to understand that there is a risk element, and then you can take it further and look at corporate-specific beliefs, for example, about poverty or the environment.”

Reaching everyone

Auto-enrolment has directed a large number of employees into the world of pensions for the first time, many of whom are unfamiliar with how they are invested; explaining things in relatable terms that all employees can understand should help to increase awareness.

Rachel Neill, head of sustainable investment at Smart Pension, says: “A lot of the ESG issues are what we read about every day in the newspapers. When people make that connection between the fact that they are saving for a future they want to live in, and that the money they are investing today can be used to create that future, it becomes a pretty compelling story.”

The nature of auto-enrolment means that not every individual is expected to be an investment specialist, but helping employees move to ESG funds if they so choose is vital: “We should be open and transparent if members are saying, ‘I want to understand where my money is going’. Ultimately, it’s their money and it’s their future,” Neill concludes.