Written by Jon Dean on Wednesday 7 November 2018
Please forgive the pun, but environmental issues and climate change are hot topics right now. Consumers are starting to understand the real-world effects of their buying decisions and taking action. For example there’s been an 86% fall in single-use plastic bags and one in eight cars sold in the UK are now electric or hybrid. Change is going to take time, but there are things that all businesses can do to speed this up – even in the world of investments and pensions. I want to talk about something that could be used to get people interested in saving for the future (in every sense), namely environmental, social and governance (ESG) investing.
Call Me Irresponsible?
It is almost universally accepted that automatic enrolment has been a huge success in getting more people saving for retirement. I find it really worrying then, that most of the 9 million new members are blissfully unaware of where their money is invested. This isn’t too surprising - the latest Wealth and Assets Survey from ONS shows that 91% of eligible workers who say they aren’t in a pension have been automatically enrolled!
In fact, the overwhelming majority of newly enrolled members will find themselves invested in default funds that take little account of climate change risk and are mediocre at best in terms of their overall ESG credentials. ShareAction’s excellent report from June this year makes fascinating reading. The Engagement Deficit scores the 10 largest auto-enrolment providers by members in terms of responsible investing and member communications. Huge credit to NEST, which was the runaway winner for responsible investing and addressing climate risk.
Since auto-enrolment captures predominately younger savers with the most to lose from rising sea levels, raising awareness of the power of their pension funds to effect positive change ought to be a priority.
The Times They Are A-Changin’
Maybe there is light at the end of the tunnel. IORP II implementation is just around the corner, and the DWP is pushing pension scheme trustees to do more to communicate how they have factored ESG into their investment principles. These reforms should drive changes in schemes’ investment strategies. Unless they can demonstrate that returns are materially worse for ESG screened funds, trustees could be seen to be failing in their fiduciary duty if they do not look to minimise the risk of doing long term harm in the world.
Irrespective of changes to the law, now feels like the optimum time for pension schemes to be shouting about their green credentials. In the wake of the Blue Planet phenomenon, social responsibility is driving a lot more consumer decisions. Surely members will be more interested in a sustainably invested pension scheme? Perhaps even having a super-green pension fund could help some firms to offset their negative impact elsewhere?
Message in a Bottle
And people are interested. Research from Boring Money found that the idea of investing with ethical principles to do good in the world engages consumers, women in particular, and that investors are prepared to accept up to 1% reduction in annual returns as a trade-off.
Even better news is that ESG screened investments don’t necessarily mean poorer returns: the MSCI World ESG Screened Index, which excludes stocks with significant exposure to weapons, tobacco, coal and oil sands extraction has returned 12.8% annually since its outset in May 2012, outperforming its unscreened equivalent by 36 basis points a year. This is a positive story to tell, if only we can talk to members in their language and ride that Blue Planet wave.
Sadly, based on the types of member communications I typically see, regulations usually lead to wordy and impenetrable documents that go unopened. I fear IORP II will do little to increase member awareness of sustainable investing. If I’m right, this would be a pity, because (to paraphrase a comment I heard recently), a pension scheme has no function if there are no members left alive to see the benefits.