Lots of providers are carrying out research on environmental, social and governance (ESG) investing. How is Royal London’s research different?
We specifically wanted to understand where ESG features in employee thinking and how significant a part of the employer’s overall benefits and policy strategy it represents. People take environmental and social issues into account in their day-to- day lives, but this does not translate into savings and investing behaviour as less than one in five say they take these factors into account for financial decisions. So we wanted to explore this disconnect and understand the extent to which employees have other priorities.
How did you research employees’ priorities and what did you find out?
We asked respondents to imagine they were spending the employer’s benefit and policy budget. This showed that pension remains by far the most highly valued benefit. Flexibility is also highly prized by employees – both in the ability to flex benefits to suit their own circumstances and the desire to spend more on improving flexible working options. These three items – pension, flex benefits and flexible working – pushed every other benefit and policy option to the margins, as far as the employee was concerned. This includes policies aimed at being more socially responsible as a business.
Does that mean environmental and social issues are not important to customers?
No, but we have to be realistic and understand that employers need to check what is important for their staff and build benefits and policies that reflect their needs. Taking into account employee needs reaps real benefits in terms of advocacy, retention and engagement. Employer advocacy as a place to work can go up by over 15 per cent as a result. But the important takeaways on environmental issues are only uncovered when you delve deeper.
Presumably the top priority here is increasing employer contributions?
Yes, nearly everyone values that. But nearly two-thirds of people said they would value having their pensions contributions automatically invested in a socially responsible way. This raises a key question – whose responsibility is it to ensure these important issues are taken into account when investing employees’ pension contributions? And who decides what is important?
People clearly see ESG as important, so do they see it as their responsibility? Most people see this as the pension provider or employer’s job. Only 13 per cent believe this is the employee’s own responsibility. This is an important message to pension providers and asset managers when developing their default investment strategy and to corporate advisers when helping employers and trustees. While employee’s desire for personal responsibility may seem low, this does make some sense. Fund managers will know most about the stocks being invested in and what their ESG credentials are.
Does this mean providers just build ESG thinking into their default and leave the employee out of it?
No. Engagement is still critical. One in three people say clear information on how their contributions are invested to support environmental or social issues would increase their interest.
So could ESG help with pension engagement issues?
Yes, if we get the language and communications absolutely right. As an industry we are not doing this at the moment. Customers don’t connect investing their pension with being socially responsible. They may think they have no power, because they are so remote from the companies they hold in their pensions, when collectively they do.
There is £3 trillion in pensions in the UK. Helping people understand it is possible to generate a good return and make a positive contribution to our society and environment could kick start a sea change in employee engagement.
Will employees look at the actual stocks held in their default fund?
This may be some way off. But a starting point could be to make it easier to get a sense of how their default is doing in ESG terms. Easy to understand ratings could be the answer.
So what does this mean for workplace pensions’ ESG strategy?
Many asset managers and providers are actually doing really good work on ESG. But we really need to let customers know what we’re doing in terms they understand. We will fail if we try and put the onus on the customer to make value-based investment decisions so building the right default is critical. Can we find a way to demonstrate which workplace defaults are hitting the mark?