What is ESG – and why is it so important to the future of UK Workplace Pensions? Steve Herbert, Head of Benefits Strategy at Howden Employee Benefits, discusses this important topic
No matter how much we might all despise them, the 21st century business world is full of acronyms.
Now the problem with such abbreviations is that they are generally pretty obscure to anyone not “in the know” on a given topic. And sometimes a new piece of verbal shorthand arrives which the vast majority of ordinary people really don’t yet recognise or understand. At the time of writing that is very much the case with the latest acronym on the workplace pensions block – that of ESG investments.
So what does it mean?
Wikipedia defines ESG as follows;
“Environmental, social and corporate governance (ESG) refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business.”
Some readers might just assume that this is merely a re-run of the ethical investing headlines and noise that dominated pension investments around the turn of the century. And they may be partially right. But the truth is that ESG is a much bigger animal than those “green” investment policies of the past. Yes, an environmental concern remains one of the core principles of this investment approach, but so too are less clearly defined items such as company culture, pay-gaps, and diversity.
The above topics play into some of the major news stories of the moment and the decades ahead. The BBC series Blue Planet exposed the environmental impact of plastic pollution, and social media movements and pressure-groups such as the #MeToo and Extinction Rebellion have all made their own mark in recent months. The reality is that the world is (somewhat belatedly) waking up to a wide range of underlying issues of national and international importance. The result of this new awareness is that the media, public, and policymakers are now reacting to these stories increasingly rapidly, and often in ways not previously seen.
Of course many of these issues conflict with the subject of making money. Historically profit has often been placed ahead of responsible investing, so the need to encourage good practice amongst major investors is vital. Which is where workplace pensions comes into the mix. For UK pension schemes are significant investors in both domestic and international financial markets. It follows that applying ESG principles to pension scheme investments is a really important step in tackling many global ills.
But isn’t ESG an SEP?
Some readers of this article may have already concluded that ESG investments might actually be an SEP (Somebody Else’s Problem). After all, there are plenty of groupings attached to any company supported pension arrangement with a vested – or indeed legal – interest in running the scheme well. So employers might look to groupings such as the Trustees of the pension scheme, the provider’s Independent Governance Committee (IGC), the selected fund managers, or even the individual pension scheme members to ensure that investments are made in line with ESG requirements. And indeed over time all these groupings will play important parts in this process.
Yet fundamentally a company pension scheme always retains an intrinsic and very public link with its sponsoring employer in the minds of members, employees, and customers. Should the scheme investment strategy be found wanting, then the possibility of reputational damage for the employer is far more likely than for the other groupings named.
And it might not just be reputational. The possibility of legal action by (or on behalf of) pension scheme members seeking investment compliance with ESG best practice is only likely to increase over the next few years. Even if such actions are directed at bodies other than the employer (for instance the Trustees), the negative publicity is likely to mainly land on the sponsoring organisation.
Finally – and certainly not least – there is growing evidence to suggest that certain demographics of workers are now wanting and expecting their pension investments to be managed in an ethical and responsible way. Employers that don’t meet those expectations might well find their recruitment & retention costs increasing, with their productivity heading in the other direction.
Any or all of the above scenarios are ones that most good employers would be very keen to avoid, so it’s sensible for them to embrace ESG early, and encourage pension scheme service providers to do so too.
ESG – The positives
Of course there is much more to ESG investments than just avoiding potential corporate banana skins. The positives of improved reputation and relationships are significant, and the good news is that investing in a responsible way does not necessarily mean lower returns on investments either.
Ashley Hamilton Claxton, Head of Responsible Investment at Royal London Asset Management said;
“There’s quite a lot of academic evidence that has been accumulated over the last 20 years, and it very clearly states that in the vast majority of cases considering ESG factors will either have a neutral or positive impact on returns.”*
Of course the wider global benefits of doing so are significant too. This is why occupational pension schemes are now required to embrace environmental and social factors when making scheme investments. Commenting on these changes (which came into force on the 1st October), Guy Opperman, The Minister for Pensions and Financial Inclusion, said;
“I believe that the changes will have a bigger effect on tackling climate change than almost any other decision by government. My colleagues in parliament tell me that pensions are not sexy, but this time it could be pension power that is the force for good to address our twenty-first century problems.”**
So ESG is a win-win for pension schemes, employees and employers. Oh, and society and the planet too. What’s not to like?
Steve Herbert, Head of Benefits Strategy at Howden Employee Benefits regularly writes for Employer News.
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*Corporate Adviser website: ESG in DC Pensions
** City AM: 01/10/19