ESG (Environmental, Social and Governance) was certainly a buzz phrase during 2020. With more focus than ever it is something that pension scheme trustees and sponsors cannot ignore. But what does ESG mean when it comes to pensions? And how can you ensure that your pension aligns to your corporate values?
Navigating ESG and your corporate values
In the context of pensions, ESG refers to the extent to which the three factors (Environmental, Social and Governance) are considered in the investments.
Many companies will have corporate values that cover corporate responsibility, sustainability, ethics and the impact on climate change. A lot of time and effort goes into defining values, embedding them into the workplace and its culture. But have you looked at whether your pension scheme aligns with those values?
Movements such as Make My Money Matter are calling upon organisations to make sure their pension investments align with their values. Organisations would do well to understand where their members’ pension money is invested to avoid contradicting corporate values and beliefs. Take for example a cancer research company unknowingly having pension investments in tobacco.
Pension trustees must already set out their policies on financially material ESG considerations in the Statement of Investment Principles (SIP). Since October 2020 this now goes even further, requiring trustees to publish an implementation statement describing their voting behaviour and whether certain policies in the SIP have been followed.
You may have ‘outsourced’ your pension obligations by making a master trust or group personal pension available to your employees. With increasing member awareness and improved transparency from pension providers, there is a risk the hard work you have put into defining your corporate values could be undermined because of the investment approach taken by your pension provider.
Approaches to ESG
Pension schemes have several ways in which they can take ESG factors into account in their investment strategies. Despite increased requirements to outline ESG policies in the SIP, the actions being taken are not always obvious.
Some possible approaches include:
Screening/Exclusion: the exclusion of certain companies from the investment portfolio, such as tobacco or oil.
Allocation to sustainability themes: the inclusion of certain types of companies in the investment portfolio. For example, renewable energy companies or companies who meet minimum thresholds for their governance or as responsible employers.
Stewardship/influence: Where the investor takes an active interest in engaging with the company to improve its actions or approach. For example, participating in shareholder voting to influence positive change.
It can be difficult to work out a pension scheme’s ESG position. To satisfy yourself that your pension provider aligns to your corporate values ask how ESG is addressed.
Here are a few things to consider:
- The scheme’s ESG policy.
- The ESG rating system used to determine the funds made available.
- The approach taken by the scheme to influence the voting rights of its investment managers.
- Transparency – can the scheme articulate the impact of any of its ESG decisions?
- Greenwashing – validate whether time and money is spent on marketing as ‘green’ rather than actually taking sustainable actions.
Although focussed mainly on Trustees as decision makers, the Defined Contribution Investment Forum (DCIF)’s Good Citizen’s Guide to ESG provides helpful pointers for formulating ESG policy. It also includes a questionnaire for Trustees to put to investment managers. Employers could equally use this model to formulate questions for their pension provider.
Transparency and member engagement
We are pleased to see progress in master trusts communicating the impact of their ESG approach, making it tangible for members to understand. Bulletins quantifying the positive impact of the investments help members understand how their money is invested and improves engagement more broadly. Members can relate to the number of trees being planted, or the number of cars being taken off the road. If you can make the connection of how their pension investment aligns with the company values as well, that can only be a good thing.
Member technology can also support ESG. More pension providers have partnered with the likes of Tumelo to improve engagement. Technology can also provide a platform for members to share their views on upcoming shareholder votes. There are further developments underway for members to align their ESG beliefs with their selected investment range. Members will be able to screen out investments by following a set of questions that show them the investment options available that map to their beliefs.
We have seen that ESG has become an area of differentiation for master trusts in particular. Some have redesigned their default asset allocation to incorporate ESG factors with great success. Others have felt constrained by their passive investment approach but have been able to include ESG focussed funds in their self-select range.
If your pension scheme could be undermining your corporate values, take action now to understand what alternatives could better align to your culture.
Go Pensions has up to date, whole of market data on the commercial master trusts available. We meet with providers regularly to understand their strategy and future developments, including their approach to ESG.
Our latest interactive DC master trust league table is available here. Contact Tina Oversby on 020 8213 5860 to discuss our insight and the options available. Tina would be delighted to talk to you.