How to ensure your pensions offering matches your corporate values
From an emerging theme only a few years ago, to a key consideration for employers today, the integration of environmental, social, and governance (ESG) criteria into defined contribution (DC) pension investment strategies is now firmly on the pensions map.
The rapid growth is due to a combination of regulatory requirements for pension scheme trustees and growing awareness from members, together with more and more employers asking whether their pension investment strategy is aligned to their corporate values.
There’s also a widely held view that ESG integration will improve investment returns. Whilst it’s still too early in the ESG journey for a track record of facts to back this up, there are some logical reasons why companies with good ESG may perform better than those without.
But what is ESG?
An ESG approach considers a company’s exposure to risks across a number of key areas, and what they’re doing to manage/reduce these risks in the future:
- Environmental risk, including climate change and net zero targets, and energy and water use.
- Social risk, including human and employment rights, and health and safety.
- Governance risk, including board and auditor independence, and succession planning.
The above isn’t an exhaustive list, but it’s clear to see that companies who score poorly in these areas present additional risks for investors, as corporate behaviours counter to ESG principles could translate into tariffs, trade restrictions, fines, reduced productivity, etc. All of these can impact the profitability of a company and therefore investment returns for investors such as your pension fund.
So, what are the practical steps that you can take to review whether your workplace pension ESG strategy is aligned with your corporate values?
First, engage with your scheme trustees or pension provider to understand what they’re doing in respect of ESG and how this impacts, in particular, your default fund. Most of the leading fund managers, as a minimum, have integrated ESG into their investment strategy through stewardship, by engaging with the companies they’ve invested in and using their voting rights to influence positive changes around ESG risks.
Next, understand your corporate values and any corporate social responsibility (CSR) policies. Is the approach your pension investment manager is taking for ESG aligned to your CSR policies and values? If so, great. If not, investigate if there are other appropriate investment options that are more aligned.
And then consider how far you want to go with ESG. Is stewardship and using voting rights to influence change enough? If not, you could consider switching to an approach that includes screening and ‘tilting’, where your fund manager excludes the very worst ESG companies and industries, and invests more in companies with good ESG scores, whilst reducing investment into companies with poor ESG scores.
But which route is right for you?
There’s no right or wrong answer. Some employers are reassured that stewardship is a step in the right direction and enough for now. Other trustees or employers want to take things further by choosing more active approaches.
It’s also important to remember that ESG means different things to different people, and everyone has their own objectives that influence how their pension savings should be invested. So, whilst it might be important that the default fund is aligned to your corporate values, providing a clear range of alternative investment options will help members to switch out of the default fund if that’s not right for them, into something which is more aligned to their own personal beliefs or objectives.
This also presents a great opportunity to engage your members with their pension. Ever struggled to get people along to a presentation to learn about how their pension savings are invested? Sounds pretty dull, right? Imagine the attendance if you were able to invite people to a presentation to “find out how your pension is reducing carbon emissions towards a net zero future, together with improving our planet and economy, to make the world a better place for us all”…
One final point to note is that ESG is still very new. So, focus on what’s right for you today, but keep things under review to reflect any changes to your corporate values and feedback from members, and look to take advantage of new investment opportunities that pension fund managers will continue to launch over the years ahead to reflect this rapidly growing area.
John Yates – Principal and DC Proposition Leader