Ethical and responsible investment within pension funds has gained momentum in recent years with scheme members looking to understand more about where their pension is being invested. Many schemes now look more closely at Environmental, Social and Governance (ESG) practices to help them ensure that their investments closely match the ethics and moral standards of their membership.
What is responsible investment?
It is important to understand exactly what we mean by ‘responsible investment’. Responsible investment defines any strategy that encompasses environmental, social and governance (ESG) factors in their investment planning and decisions. Many investors have a keen interest in where their money is being invested and want to ensure their money is being invested responsibly.
For example, many investors will not be happy for their pension to be invested in the oil industry due to the impact of carbon fuels on the environment, but would be pleased to invest in renewable energy companies.
Why do I need to consider responsible investment?
Responsible investment is not a ‘tick box’ exercise. Many key ESG issues such as climate change, equality and biodiversity are seen as having a profound impact on our lives, and that of future generations.
When it comes to your pension scheme, it is crucial to ensure you think about your approach to responsible investment. Most pension scheme members will remain in the scheme’s default fund throughout their entire career. Responsible investing helps employers ensure their pension scheme’s investments match their corporate ethics and culture and those of their their people. Doing this whilst still ensuring that the fund makes good economic sense is easier when a good governance structure is in place. Responsible investment is constantly evolving and so you should ensure you understand any fundamental changes, and that your pension provider is keeping up with others and your own changing expectations in an evolving area.
No ‘one size fits all’ approach
Responsible investment will mean different things to different people and so a one size fits all approach will not work here. For some people and organisations climate change may be their number one priority; however, others may focus more on diversity and inclusion or equal pay.
Different pension providers will also have their own approach when tackling ESG investment issues. It is important to understand what your fund manager focusses on. Most providers will have extensive information on their approach to ESG on their website or you will find more details in your pension scheme’s documents.
The future of investment
Responsible investment is only going to become more important and the responsibility on workplace pension schemes to consider responsible and sustainable investment is going to increase. There has also been increasing pressure on the UK Government to put in legislation to ensure that automatic enrolment pension providers must commit to net-zero emission investment strategies, with two major DC pension providers already committed to net zero by 2050.
As well as the fund selection, stewardship plays a key role in ESG. With pension funds holding millions of pounds in shareholdings, they can use their voting rights to lobby for positive outcomes. If employees are able to see the results of this, or even feed their views into the relevant fund managers, this is a great way to show the impact stewardship has on promoting positive change.
What should I communicate?
So what should you communicate to your members? Being open with your people about their pension scheme is always the best approach. Allow them to understand investment choices, the options available to them and communicate where they are able to find more information about where their pension is invested.
Keeping your communications, short and easy to read is the best approach to engage your people in order to involve them in the process better. The bottom line is that responsible investing is very important to your pension scheme members so it is important to consider it in your wider investment strategy and communicate effectively with your people. If your pension fund has an ESG strategy that matches your corporate position then this may be the easiest and best message to communicate.
Find out more about Pension Scheme Governance and watch our introduction video to ESG.