ESG – Meaningful or just well-meaning?

Pension schemes have a key role to play in helping tackle climate change. Some approaches to decarbonisation are more effective than others. Emma Douglas, head of DC, Legal & General Investment Management

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What does meaningful climate action look like in the DC pensions industry?

There are two ways pension providers can help bring about meaningful change in tackling the climate emergency – asset allocation and active asset ownership. 

Decisions around asset allocation need to incorporate climate considerations, which means participating in financing the transition to a low carbon economy and encouraging investments in clean energy. 

Active asset ownership means using the investments we manage on behalf of our members to influence the companies that we’re investing in. Whether investors hold companies to account or not has a crucial impact on how these companies are run and the likelihood of them achieving decarbonisation targets aligned with the Paris Agreement to limit climate change to well below 2 degrees. 

I love the enthusiasm with which parts of the pensions industry are embracing climate change and environmental, social and governance (ESG) factors. Yet in some cases it feels like a box-ticking exercise, with pension funds and providers choosing an ESG label without really looking under the bonnet and ensuring the fund managers being used are engaging effectively with investee companies on behalf of their members. 

How are you reflecting these views in your investments, including in your default funds?

Active ownership is key. Legal & General Investment Management (LGIM) works with companies, policy makers and other investors to create sustainable value over a long term horizon through engagement and voting. And part of this engagement specifically targets climate change and Paris alignment. 

We have implemented a minimum standards exclusion policy across all of the equity holdings in our auto enrolment DC defaults. This filters out pure coal miners, manufacturers and producers of controversial weapons, and perennial violators of the UN Global Compact. 

Furthermore, Legal & General Group has committed to net zero carbon by 2050, and is starting to decarbonise the assets on its balance sheet. And we already incorporate ESG considerations in a number of other ways. As well as the climate impact pledge that we run across the whole of our default range, the Future World Multi-Asset Fund incorporates ESG tilts across equities and corporate bonds, and will be tilting across more asset classes going forward. 

How are you engaging with members on ESG issues and giving them a voice?

The reality is that before we even talk about ESG to our 4 million members we need to explain the basics of pensions. Our survey of around a thousand workplace pension savers found 50 per cent of women and 48 per cent of men were not even aware their pensions were invested in companies. So that is the first engagement priority. But encouragingly, once they realise that their pension is invested in companies people can get very engaged, as long as you explain it in language that they understand. 

To take stewardship and voting to the next level we have  partnered with Tumelo, a fintech platform that shows members the holdings in their portfolios and allows them to feed in how they would vote on key initiatives. In a Tumelo pilot across two schemes over 3,500 votes were cast. Interestingly, scheme members were really interested in high profile companies – such as whether Mike Ashley should be re-elected as CEO of Sports Direct – but they were also engaged in ESG themes. 

What can the pensions industry learn from  other sectors’ approach to ESG factors?

When you’re talking about environmental or socially responsible approaches, people need reassurance that there are no drawbacks.  They want to know that the essential features they value in a product, whatever that product is, are uncompromised or even enhanced. 

If you buy an electric car, you want to make sure it is going to work. For pensions, you need to be reassured that you’re not going to lose out in terms of investment returns. 

The experience of other industries has also shown us the need to make the product relevant and come up with stories that connect to people’s personal context or lived experience. 

How will the pensions industry’s response to climate change evolve over the near and longer term? 

In the near future the focus will be on regulation, for example around Task-Force on Climate-related Financial Disclosures (TCFD)  reporting. And I expect more focus on the detail of how we approach Paris alignment, and the points on the way on the long road to 2050. 

I also expect more focus on the standardising of industry reporting, which will enable investors to see the percentage of a portfolio that is ESG-tilted or how much carbon reduction is being achieved. 

Going forward we can expect a greater focus on extending ESG and climate integration beyond equities into other asset classes.
We can also expect to see considerably more investments with a direct climate impact, such as renewables.

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