ESG & Pensions: A time for action
13 May 2021
The dust is settling on a turbulent 18 months for the nation, its employers, and their employees. And as normality (hopefully) returns, so too will some of the key topics that have been in a period of suspended-animation since the start of the pandemic.
And a key concern for employers in the years ahead is likely to be the subject of Environmental, Social and corporate Governance (ESG) investments within company-sponsored pension arrangements.
So what is ESG?
Yet many readers of this article won’t fully understand what ESG means. It’s a relatively new acronym, so let’s start with the Wikipedia definition;
“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 will assume that this is just a re-run of the “green” investing headlines and noise that dominated pension and other corporate and personal investments in the early years of this century. Yet the focus then was mostly on “environmental” investments, whereas ESG defines a far more diverse and far-reaching set of objectives.
More important and more reported
For whilst an environmental concern remains one of the core principles of this investment approach, so too are other potentially sensitive – and increasingly important – issues such as company culture, pay-gaps, and diversity. The truth is that ESG subjects have made up a large percentage of the daily media agenda in recent months, and will continue to do so for many years to come.
On the environmental front the UK hosts COP26 later this year – a key international conference focused on climate change. The UK government has also recently advanced its net-zero targets for the nation, and internationally there is renewed momentum to tackle this issue following the appointment of Joe Biden as the new president of the United States of America.
Other ESG issues have remained high-profile during the pandemic too. Historical wrongs and racial injustices were widely reported over the last year, whilst social media pressure groups continue to highlight areas of personal and/or corporate misconduct. And whilst the subject of pay gaps (gender / disability / ethnic) may have been muted in recent months, this is sure to return to the mainstream media agenda just as soon as corporate reporting returns to pre-pandemic normality.
The truth is that the world is 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 far more rapidly than in the past. And it follows that businesses are increasingly taking steps to quickly distance themselves from a cause or individual that might be considered potentially toxic to their corporate ideals and image.
Yet far fewer organisations have perhaps taken the next logical step in this process; to consider ESG factors within the investments of their company-sponsored pension scheme.
ESG and Pension Schemes
For UK pension schemes are significant investors in both domestic and international financial markets, and these investments have the potential to expose the sponsoring-employer to reputational risks too.
That said, not all employers would recognise this as their risk, if only because there are plenty of other 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 manager, or even the individual pension scheme members to ensure that investments are made in line with ESG requirements or needs. And indeed over time all these groupings will play an important part 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 to the employer is far more likely than for any of 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 reality is that any negative publicity will likely be associated mostly with the sponsoring employer. Indeed a UK tribunal case just before the pandemic struck really highlighted that particular area of reputational risk.
Finally – and certainly not least – there is growing evidence to suggest that certain demographics of workers now want and expect 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 engagement and productivity heading in the other direction.
ESG – The positives
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. Yet there is far more to ESG pension-scheme investments than just avoiding corporate banana skins.
Indeed the positives of improved reputation and better relationships with customers, supply chains, the media, and employees are all potentially very significant for any business.
From a purely financial perspective it’s worth noting that investments that are considered better for our planet and/or collective wellbeing are likely to benefit from the renewed and increased level of international political will that is now increasingly evident. This may well help boost ESG investment returns over time.
And, since 2019, it has been the case that UK occupational pension schemes are required to consider ESG factors in their scheme investments. So, if only for the sake of legal compliance, employers should be checking their pension arrangement to see if this requirement applies to their scheme, and take corrective action as necessary.
The reality is that every UK employer already has to provide a company-sponsored pension arrangement, and that ESG investing is here for the foreseeable future. So it follows that employers should join up the dots between the two, and aim to ensure that their company culture and objectives are met in their pension offering as much as in their other day-to-day activities.
For more information on any of the above topics, please speak to your usual Howden Consultant in the first instance, or visit our website for other contact options. For the latest details on COVID-19 & Employee Benefits provision please visit our coronavirus hub.
Steve is Head of Benefits Strategy, Howden Employee Benefits & Wellbeing, and is an award-winning thought leader on Pensions, Employee Benefits, and Human Resources issues. He is occasionally accused of making Employee Benefits interesting.