Whether it is the latest gender pay gap survey or Greta Thunberg speech, environmental, social, and governance (ESG) issues are rarely out of the news, and are of particular concern to younger employees.
So, employers who turn a blind eye to them do so at their peril. Not only are current and prospective employees increasingly scrutinising their own company’s ESG stances, they are also becoming concerned about those of the companies held in their pension fund.
Many pension scheme members now look well beyond the financial outcomes of investments and can be just as interested in the impact of those assets on society and the role they have in promoting global causes.
Environmental issues can include everything from climate change and the conservation of natural resources to waste management, pollution and fossil fuel extraction. They also relate to activities aiming to aid the transition to a low-carbon economy, such as renewable energy and electric car production.
Social issues are focused on people – from employees and customers to suppliers and individuals based in the proximity of a company’s operations. They can embrace labour relations, diversity and health and safety as well as matters like human rights, slavery and child labour.
Last but not least, the term ‘governance’ refers to the practices, rules and codes of behaviour influencing how an organisation is run – impacting everything from people issues to financial, strategic and risk management ones. These can include the diversity of board and leadership teams, executive pay, data privacy, political lobbying and anti-fraud and corruption measures.
Legal & General’s recent ‘Finding the greenest generation’ research into the views of Baby Boomer, Gen X and Millennial savers finds that around 60% of Gen X would prefer to invest less, or not at all, in companies with a perceived negative social impact.¹
It also finds that 44% of Millennial men and 47% of Millennial women would like to significantly reduce their pension’s exposure to the fossil fuel industry, irrespective of their impact on pension returns.¹
Employers should therefore be aware that, although the workplace has tended to lag behind the retail market for ESG investment options, group pension providers have recently been catching up.
Defined contribution schemes now commonly offer the option of at least one ESG fund, and we are even seeing the emergence of ESG default fund options.
An ESG default fund will not necessarily be the right choice for all employers but it could appeal to those involved with business areas like recycling or providing solar panels, or to those priding themselves on an unusually strong ethical focus.
In other cases it may be better just to offer a range of ESG funds. Indeed, doing so could be justified simply on grounds of portfolio diversification alone because the performance of these funds often compares favourably with that of standard funds.
One of the reasons commonly given to explain this is simply that companies that follow high quality environmental, social and governance standards are more likely to survive and to perform well in the long run.
Some experts also believe that ESG focused operations are intrinsically better positioned to react to crisis and change as, by definition, the ESG message is also one of change. The mayhem caused by the coronavirus pandemic could therefore bode well for them.
But there are now so many ESG investment choices available in the corporate pensions market that the field can seem complex and confusing, particularly in view of some of the terminology bandied about.
Terms like ethical investing, socially responsible investing (SRI), impact investing, sustainable investing and green investing are often used as though they were synonymous with ESG investing but there are some subtle differences between them.
Sources: ¹ www.legalandgeneralgroup.com
Content correct at the time of writing and is intended for general information only and should not be construed as advice.