How has ESG in pensions evolved in recent years?
We have seen significant changes in the last five years. Initially ESG was primarily a risk management tool, aimed at identifying sectors and individual companies whose future profitability could be affected by issues like stranded assets as we move into a lower carbon economy. But now there is a far greater focus on positive engagement and stewardship, and the importance of investing pro-actively in the companies and sectors that can help make a difference.
ESG is embracing a broader range of social and environmental issues – we’re looking at biodiversity alongside carbon reduction and a whole range human rights issue, from eliminating child labour in supply changes to fairer pay policies.
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Has an increased focus on ESG impacted member engagement?
Members might not use the term ‘ESG’ but we know from the queries we get to helplines and questions asked online that people care deeply about environmental and social issues, and want to know where their pension funds are invested: is their money helping tackle some of these issues or contributing to the problem?
We want to ensure that members know where their money is invested, and the positive impact this is having.
But this is also an opportunity to connect with members and to get them thinking about their pension: are they in the most appropriate fund, how much are they contributing, what income will it generate in retirement? We want to harness people’s enthusiasm for ESG issues and use this to deliver better pension outcomes.
How can the integration of illiquids into DC pension schemes support ESG objectives?
Large pension schemes like ours have been looking to diversify our investments and benefit from the long-term returns that can come from investing in private markets and less liquid assets, such as infrastructure. This can also be a powerful way to invest directly in the companies ad organisation that are developing the new technology and infrastructure that will help us deliver on ESG goals. This can include solar and wind farms and the clean water sector, which are helping green the economy and move towards a net zero future, as well as healthcare companies and affordable housing schemes which are contributing social benefits.
Our research indicates there is widespread support for this with 80 per cent of members more likely to engage with their pension if it is responsibly invested. The data shows around 72 per cent of members would pay higher fees to invest in infrastructure that supports renewable energy, and 70 per cent would be happy to pay higher fees on investments that create affordable homes or support local jobs. There is a real opportunity here to deliver pensions that provide good returns for investors and also support their values.
What progress are providers making towards net zero targets?
There has been huge progress across the industry. At L&G for example we have already met our 2025 net zero target for the TDF funds, which are now the main default option, and are close to our 2030 target.
But it is often easiest to make the most significant progress early on by targeting the low hanging fruit, in those areas where smaller changes to investment portfolio can initially have a significant impact. The bigger challenge will be making the same gains at the same speed going forward.
We also need to remember that the real target is bringing down real world emissions, not just excluding companies or sectors from a portfolio to make improvements to an artificial metric.
This is why stewardship is important. As a major asset owner and manager we want to use our scale to improve corporate behaviour by voting at AGMs on a range of issues. We have ambitious net zero targets but understand that progress will only be made as the economy as a whole decarbonises. Through our stewardship activity we can contribute to this process
Jesal Mistry is head of DC investment proposition for Legal & General Investment Management