You will know that all UK employers are legally required to automatically enrol their workers (subject to certain criteria) into a pension scheme. Those who pay into pensions (i.e. employers and employees) may be becoming increasingly aware of the fact that with an increasing amount of money being invested in pensions comes increasing power to influence the investment decisions being made at a corporate level.
Interest in the ethical aspect of investments has been growing over recent years and discussions are not just restricted to the meeting rooms of large financial firms. For example, Richard Curtis , the Love Actually director and Comic Relief co-founder, has launched a campaign that aims to help move some of the £3tn in UK pensions out of industries that are harming people and the planet and into sustainable businesses.
The Coronavirus pandemic has caused many of us, including perhaps your employees, to reflect on some important topics that are at the forefront of the news. We have been in an environment where we have had the chance to consider the actions that we take in more detail, including the impact that our decisions have on others. This may have included reviewing our pension funds to see how and where they are invested. This is important as, for many of us, our pension fund may be the second largest asset we have (after our home).
As employers, we should be prepared to answer any questions from group scheme members around this subject and be able to demonstrate that we’re ‘doing the right thing’ in terms of how and where pensions funds are invested.
How are things changing?
Historically, members of pension schemes had the ability to select funds which were labelled as ‘ethical’. Different funds used different approaches, with some focussing on the exclusion of holdings in certain industries. The industries which could typically be excluded included:
- Animal testing
- Certain manufacturing which could be considered to be harmful to the environment
- Nuclear power
Another traditional approach meant focussing on the most ethical companies in these sectors, for example oil companies who were heavily investing in renewable energy sources.
However, these approaches did sometimes mean that investment performance lagged behind other funds which did not apply this set of criteria, so they were often less popular with investors.
In recent years there has been growing interest in ethical investments, but the emphasis has shifted now to what is known as ‘ESG’ investments.
What is ESG?
ESG is a term used to refer to investments which focus on ‘Environmental, Social and Governance’ elements:
- Environment – this is simply the interaction of the investment with the physical environment. Topics for consideration include climate change, biodiversity, natural resources, carbon emissions, air and water pollution.
- Social – this is more focussed on the impact on society and communities, including human rights, health and safety issues, labour standards, product liability, privacy and data security and so on.
- Governance – this final aspect looks at how companies are governed, including diversity, transparency, ownership, board independence, ethics, executive compensation and so on.
Why is ESG proving to be different to ethical, as a way of investing?
The focus on the two additional elements of social and governance means that companies who place a significant emphasis on ESG criteria tend to be well run, have good long-term prospects for stability and growth. This can make them attractive from an investment perspective, and we are seeing pension scheme trustees, employers and pension scheme members benefit from a stronger emphasis on this from default funds – without additional costs to members.
How are pension providers applying their ESG criteria in practice?
There are a number of steps that pension providers can, and do, take. Some examples include:
- Using shareholder power to influence behaviour through voting rights
- Excluding certain sectors, companies or practices with poor ESG profiles
- Positive selection of companies with better or improving ESG profiles
- Investment in companies pursuing financial returns alongside positive social and/or environmental impact
- Focussing on specific ESG factors – for example, climate change or women’s empowerment
It would be fair to say that some pension providers have a stronger focus on ESG than others.
How can I be sure that the pension scheme that is in place for my employees operates in this way?
To be certain that your pension scheme (and your own fund as well of course, if this is different) has a strong focus on ESG factors, we can provide an assessment of the ESG credentials of both the pension provider and the default fund that is being used by members.
Please contact us at firstname.lastname@example.org if you would like to discuss this in more detail with one of our specialist workplace pension consultants.