ESG considerations bring with them opportunities as well as challenges for pension schemes, ranging from issues of member engagement to the crucial task of aligning investment strategies with sustainable practices.
Delegates examined the challenges and developments in incorporating ESG into pension schemes, discussing its significance for companies, how it affects member engagement, investment as well as the wider geopolitics.
Engagement
Richard Sweetman senior consultant at Broadstone highlighted the importance of ESG in pension schemes but drew attention to the issue of low member engagement.
He has seen that only a small number are engaged in investing and ESG matters. In spite of this, he acknowledges that, while its influence is still limited, ESG serves as a catalyst for conversations at trustee boards and member feedback.
He said: “I think anecdotally it is one of the triggers that promotes conversations at trustee boards. We’ve had some member feedback when some of the biggest schemes do member questionnaires, for example. I wouldn’t say it’s particularly Gen Z, it’s a broad spectrum of members that we see that are interested in it. But again, at the moment it’s a very low level.”
Jesal Mistry head of DC investments at LGIM outlined how ESG efforts can increase pension engagement, citing things like webinars and tailored messages. He suggested shifting focus towards ESG strategies that are aligned with the clients’ risk management, despite trustee boards prioritising investment returns.
He said: “You find that individuals engage a lot, lot more with their pension and the hope is that over time if they engage more with their pension, they might understand it more and might make better decisions and get better outcomes. But by doing some great things from an ESG perspective, you can benefit individual members as well from an outcomes perspective. There is a kind of a virtuous circle that sits here.”
ESG issues are still not the top priority for many companies, according to Clare Keeffe, senior sustainability investment consultant at Barnett Waddingham, due to industry and customer appeal. She anticipates a crisis because of the low pension engagement but points out that there is an opportunity for the pensions industry to overcome the generational gap in values.
She said: “I’m struck by the lack of engagement on pensions and the fact that we probably have a looming crisis coming. It almost feels like if the younger generation cares more in some way, do we, as a pensions industry, have a huge opportunity here to try and bridge some of that gap?”
Real-Life Stories
Alex Quant head of ESG research and investment consultant at XPS emphasised that members and sponsors are not primarily concerned with the carbon footprint number itself. Instead, they prioritise understanding the impact of the footprint in terms of company exclusions, engagement efforts, and future strategies. He said that real-life stories about affected companies hold more weight in discussions and decision-making.
He said: “The larger end trustees generally have got on board with the fact that climate change is a material risk and they are therefore willing to entertain the analysis and the stories that come out of it, which has been good on the engagement piece. They care more about the impact of that in terms of what companies have been excluded, what engagement is taking place to either bring the footprint down or to deliver that sort of forward-looking end strategy. But in terms of the discussion, it’s more helpful to bring it back to real-life stories.”
He emphasised that sponsors and trustees focus on the managerial process and approach to portfolio management rather than static data points like emissions figures or alignment measures, valuing ongoing management practices over snapshot data.
More Voice
Claire Brinn policy manager at ShareAction emphasised the necessity of both disclosure and real-world change to tackle climate change. She said that initiatives such as the Sustainable Development Index (SDI) might encourage a wider adoption of sustainable practices.
According to Brinn, governments and larger players like pension schemes should be more accountable for driving change than individual pension savers, who may lack knowledge and authority.
“I think it’s a bit unfair to put the onus on individual pension savers when they won’t have the information, they won’t have the freedom to make decisions. It would be great if individual pension savers had more voice and more ability to express their preferences and use things like Tumelo to be able to vote and express their views.
“But I see the levers of change being at the macro level by big players, not the little guys because they can’t shift the dial.”
David Farrar, senior policy manager at Peers for Planet stressed the need for standardised information in decision-making, though he also valued disclosure efforts like footprint tables. He agreed with Brinn that disclosure alone won’t solve climate issues but he also argued for imposing disclosure obligations on pension schemes to drive change.
He said: “If you give pension schemes duties but they don’t have any accompanying disclosure duties then nothing is going to happen. But we can argue about how extensive those disclosure duties should be.”
He also suggested that league tables could still influence pension schemes’ actions even if it is not widely read by the public.
Brinn stated that if investments were made in companies with more robust ESG policies as opposed to those without, a major shift could occur. She said: “I would love to see people actually move their money as a result and then that, I think, will have an impact.”
Geopolitics
Over half of the global population heads to the polls this year, and delegates said that attitudes towards climate change are likely to influence how they vote. Delegates also discussed the growing gulf in global ESG practices either side of the Atlantic.
Quant said that he was now seeing a varied approach between Europe and the US, but stressed he was also seeing a markedly different approach to ESG between different states within the US.
He said: “If this leads to withdrawal from initiatives like Climate Action 100+, it has the potential to create a negative narrative and distract from positive news stories.”
He mentioned that he makes an effort to emphasise to his clients the financial importance of climate change as a risk factor.
Sweetman drew attention to data around voting intentions in the UK which suggested that the third biggest concern amongst UK voters was climate change. He also highlighted the Peoples’ Climate Vote, the world’s largest survey of public opinion on climate change published in 2021 which found that 64 per cent of
people believe that climate change is a global emergency. He underlined how climate change has political ramifications and how it will be relevant in the next elections, influencing a large number of people worldwide.
A number of US asset managers abandoned Climate Action 100+ in reaction to its Phase 2 strategy. BlackRock raised fears that there might be legal consequences in the US if invested firms use client funds to cut emissions.
Mistry made the point that, despite certain climate change measures being rolled back, Europe has a more established framework and policies in comparison to the US.
He said: “Organisations that are focused in the UK and Europe are seeing, benefiting and continuing their march towards that. Those that are maybe more US focused are feeling pressures that are making them do things that maybe they didn’t initially set out to do.”
Mistry addressed how different strategies are used in the US, where pressures could cause unexpected moves. He stressed the significance of transparency when employing tools such as Sustainability Disclosure Requirements (SDR) for data to facilitate well-informed decision-making.
He noted that, despite challenges, sustainable methods are still being adopted in some regions while others are being more careful.
He said: “I think it’s really important that using things like SDR helps to disclose the right things, helps to describe the funds and what’s happening in the right way. Those decision-makers can make appropriate decisions and consultants can look at the funds and assess them on an appropriate basis.”
Brinn highlighted the benefits of greater transparency and data and called for organisations to maintain the momentum and exert pressure on legislators to take appropriate action.
She said: “I think it’s all quite worrying, but there are definite ways forwards, and there’s a lot of impetus and there’s a lot of momentum. We just need to carry that forward as organisations and put pressure on policymakers to do the right thing.”
