Changing employee attitudes and new regulations mean ESG issues cannot be ignored with pensions.
Employers could be forgiven for patting themselves on the back if they have achieved low auto-enrolment opt-out rates and selected a default fund that has been demonstrating a stellar track record. But they should also be aware that many employees nowadays are expecting more from their investments than just healthy returns.
Environmental, Social and Governance (ESG) has become a hot topic in the pension world. A wealth of research already shows that employees, particularly millennials, are becoming increasingly concerned to ensure that their pension savings are invested in a way that makes a positive impact on the world they live in.
They don’t want to feel they are simply helping to hand over loads of money to make rich people in the City even richer, but would prefer to think that they are contributing towards a force for the good that will make the society they eventually retire into a better place.
This will become an even hotter topic in October 2019 when new Department for Work and Pensions (DWP) regulations kick in. These will govern how pension fund trustees of occupational schemes consider ESG factors in their investment decisions and how they should address pension savers’ ethical concerns and wider interests.
The majority of trustees will be required to explain their approach to ESG factors, stewardship of investments and ethical issues, and many will also be required to report annually to pension scheme members on what they have done to implement their approach on these subjects.
The Financial Conduct Authority (FCA) will also be consulting shortly with a view to bringing in similar rules.
So, there will soon be no hiding place for employers who fail to get their heads around this new trend. They need to be aware of how these changes might affect them and should be considering the views of their workforces to ensure their pension scheme meets their values and aspirations.
When doing so, it is important to realise that offering an “ethical” or ESG default fund does not necessarily involve subjecting employees to potentially lower returns than would be realised by a standard default fund.
Figures released by the Investment Association show that over the past decade ethical funds produced a total average return of 125.2%. This compares to a return of 115.8% from the FTSE All-Share Index, and 115.6% from the FTSE 4 Good UK Index – which aims to track those companies with the better ESG ratings. *
But research carried out at different points has produced fairly contradictory results when it comes to comparing ethical investment returns with those of standard investments. Much depends on the time period concerned.
Indeed, Chase de Vere’s view is that, overall, performance between the two is probably best regarded as neutral. Remember also that, even when ESG investments are underperforming, the fact that fund managers are including them can give a fund greater long-term stability as underlying companies with a commitment to ESG will be better managed and so positioned for sustainable growth.
So, we feel that employers should already be at least taking into account feedback they have received from their workforces on their investment preferences and considering ESG funds as default funds.
October 2019 could only mark the beginning of a host of regulatory changes in favour of ESG pension investing.
Some further changes are in fact already scheduled for October 2020, requiring relevant schemes to produce and publish online an implementation statement setting out how they acted on both their stated principles and on the statement covering how they would take account of the views which, in their opinion, their members hold.
We would not be at all surprised if other stronger pressures are also asserted in due course. After all, the Government is clearly intent on using industry as a lever to meet its own carbon reduction targets, and the pension fund investments being made form an important part of this.
*Past performance is not a guide to future performance