Although awareness of ESG issues is growing among pension schemes and across society more broadly, what remains low is direct engagement from pension scheme members.
Understanding a provider’s responsible investing strategy is key for employers to be able to offer suitable investments to their members, as well as to boost engagement.
For Ryan Medlock, senior investment development manager at Royal London, a number of strategies would make it easier for employers to invest more responsibly in their pension plans.
He says clearer signposting so that employers can understand which investment options do what and consequently how they perform would help, adding that the Financial Conduct Authority is expected to publish a consultation shortly on sustainability labels.
Medlock says that the Taskforce on Climate-related Financial Disclosures, which became mandatory last year, and is aimed at improving as well as increasing reporting of climate-related financial information, would also make a difference.
Make it clear
Another issue that is evident is the clear definition of what constitutes ESG in any given context, as it can seem quite broad and is ever-changing. Regulation and discussions around ESG terminology are discussed in this guide.
Medlock adds that providers taking more responsibility for design and suitability of defaults would be useful too. “Without this, employers or their advisers have an increased burden in selecting options other than a provider’s default.”
In this area, Medlock says an increase in stewardship activities, alongside a playback on the outcomes of such engagements to understand their potential power, can act as a “force for good”.
For Dan Smith, head of workplace investing distribution at Fidelity International, providers need to deliver transparency on what assets are held within particular funds and what the ESG score is for each fund.
Smith says: “For instance, this can be found on our fund factsheets in PlanViewer – our online portal which allows members to view and manage their pension.
“FinTech tools such as Tumelo – where members can submit their opinions on ESG topics relevant to the funds they are invested in – can also provide this level of transparency.”
Brian Henderson, partner and head of sustainable investment at Mercer, says the obvious way to invest responsibly is to integrate more sustainable investment with the default arrangement.
He adds that providers can make it easier for employers to invest responsibly by “expanding the self-select range to either have a dedicated ESG section, or if there is a stronger view, they might ensure all their self-select funds have ESG or climate considerations fully integrated”.
“The challenge here is ensuring that the employer has undergone some form of belief-based study to articulate their ESG and climate objectives in order to pass them onto the provider.”
Henderson is, however, sceptical as to whether employers do carry out such belief-based studies. He says: “I suspect this is rarely done in practice.”
With the growing knowledge and understanding of ESG principles in financial markets, it seems as though this might be a pertinent way to engage customers.
