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The new value for money regulations will require schemes to assess performance on a range of metrics, from investment performance to quality of services. But will this lead to a renewed focus on sustainability and impact — or will the need to deliver above average performance make it harder for schemes to prioritise ‘values’ and beliefs through responsible investment strategies?
This was the key issue under debate at a recent Corporate Adviser roundtable. Delegates agreed that while responsible investing is increasingly seen as being aligned to strong financial returns, challenges remain, particularly in terms of the changing regulatory landscape around fiduciary duty and the difficulties of measuring impact and stewardship activity.
Changing terminology
One area of discussion was the subtle shift in terminology around sustainability in recent years. Falling out of fashion is the ESG acronym, for environmental, social and governance factors, in part due to political pushback in the US. This has also led to terms like ‘resilience’ gaining traction over ‘sustainability’. Delegates at the event says that rather than framing ESG as a moral imperative, the focus is now on resilience, long-term planning, and risk mitigation.
This evolving terminology reflects a broader effort to make ESG more politically neutral and business-oriented, ensuring it remains a priority without triggering investor or regulatory backlash.
But despite this shift, those at the event agreed that ESG’s core challenges — climate change, social issues, and governance — remain pressing investment issues. Aon chief investment officer Jo Sharples said: “There’s a lot more focus on resilience rather than just climate change. Businesses still have to sort out their supply chains, protect their workforce, and think about how they remain competitive. It’s not going away, but the way we talk about it is shifting.
“Sustainability or ESG hasn’t died. What I have seen is just a subtle shift in the language. These are the things occupying us, how we put strategy together, deliver performance, and ultimately achieve outcomes.”
This shift in language also impacts how investors and asset owners approach ESG. Instead of outright exclusions of certain investments, there is a growing emphasis on stewardship — actively engaging with companies to drive meaningful change.
LCP partner Nigel Dunn said: “Trustees are saying there’s only so much we can do as an asset owner. We need other ways to engage on climate change, and principally, that’s through stewardship.”
According to delegates, maintaining a seat at the table and voting on resolutions at AGMs allows investors to influence corporate behaviour more effectively than simply divesting these company shares. However, some cautioned that engagement alone might not be enough to drive real change. Sharples added: “You can only do so much through stewardship. Otherwise, you end up with really unproductive situations where you’re pushing companies in directions they simply won’t go.”
Fiduciary duty
Fiduciary duty is at the heart of this debate, raising questions about whether trustees and asset managers should focus solely on delivering the best financial returns for members, or whether they should also consider broader social and environmental factors. Some argue fiduciary duty is evolving to reflect modern challenges — and optimum financial returns can’t be achieved without considering broader ESG factors. But others caution that extending the definition of fiduciary duty to include these wider issues could create regulatory and financial complications.
A key concern is measuring and comparing ESG-focused investments with traditional financial returns. Barnett Waddingham senior investment consultant Gareth Doyle noted: “There are legal discussions about whether fiduciary duty should be expanded beyond purely financial factors. If that’s the case, can you imagine the can of worms it opens up? It’s not just about returns, [trustees] might need to consider the broader world into which members retire. How do you balance additional returns versus global impact?”
Redington managing director Jonathan Parker added that redefining fiduciary duty would likely require a lengthy process involving the Law Commission.
He said: “Changing the definition of fiduciary duty would require going back to the Law Commission for a multi-year project. It feels unrealistic at this juncture—we’ll likely need to work within the existing framework for now.”
Aon market development lead Nigel Aston suggested that it was possible to balance current fiduciary duties with broader social goals. In fact he added that this is likely to boost engagement with members. He said: “Telling people they’ll have more money in retirement and live in a better world is a strong message. But it doesn’t take away the fiduciary duty to deliver good returns.”
Others said that integrating ESG into fiduciary duty could increase costs for pension funds and asset managers, ultimately affecting performance. If sustainable investments come at a premium, trustees may struggle to justify them under traditional fiduciary principles.
Sharples pointed out that even slightly higher fees can prevent schemes from being included on a shortlist, so there remains a strong focus on costs across the industry.
As a result defaults have been reluctant to invest in higher-charging private assets. As well as potentially boosting overall member outcomes these assets can also help schemes deliver on ESG objectives, particularly when it comes to supporting investment into domestic infrastructure and social projects.
Similarly active ESG funds with a strong stewardship remit can also have higher costs than a basic ETF or tracker that follows a main stock market index.
PwC director Roshni Patel said: “Some charges are nearly double. How do you tell someone their costs will double and they should expect better returns?” These defaults may be more closely aligned to trustees’ stated ESG objectives and may be better placed to deliver longer-term value — but these higher returns are not guaranteed she said.
Employer values
Because current UK regulations do not explicitly include ESG-factors within the Value for Money (VfM) framework there is concern that ESG strategies may be downgraded as they don’t fit the the regulatory definition of ‘value’.
Concerns that this may mean AE pensions do not align with corporate values were also voiced, with companies increasingly recognising the importance of ensuring their pension scheme reflects their publicly stated corporate beliefs, driven by corporate responsibility concerns and the risk of reputational damage.
Aston noted: “We’re starting to see companies say, ‘at the very least, our pension investments should align with what we say on our website about our values.’ Otherwise, it’s a very odd look.”
The discussion highlighted how aligning investments with corporate values impacts both employers and trustees. Dunn also raised concerns that the FCA’s VfM consultation may discourage trustees and providers from integrating strong values into investment strategies. The proposed framework — where an amber rating could halt new business — risks pushing decision-making toward compliance, he said, rather than conviction.
“There’s a risk that regulations drive decision-making. If you’re slightly more progressive in your investment beliefs and your performance is below average, under current proposals, an amber rating could mean pausing new business.”
Engagement
A persistent challenge with ESG investing is the gap between member attitudes and their actual investment choices. While surveys consistently show strong support for sustainable and responsible investment strategies, member engagement remains low, with most employees remaining in default pathways rather than actively selecting ESG options.
Sharples highlighted this disconnect, stating: “Most of our members have got a range of options, and you’d think they’d want to choose the ones with an ESG impact. But actually, not very many people at all select them. They still end up in the default.”
This gap between corporate ESG commitments and individual investment preferences raises questions about how to drive meaningful participation. Some experts suggested better communication and education on sustainable investing could encourage more employees to make values-based financial choices.
Others pointed out that technology could be instrumental in closing this gap. Digital platforms and apps could provide members with real-time insights into how their pension investments contribute to ESG goals.
Isio investment director Sukhdeep Randhawa added: “I wonder how much that also relates to advancement in technology and the usage of apps, and how the member engagement drives the sustainability investment agenda. So the more people that engage in it, the more that the industry will innovate and create more on the self-select fund range.
“But I think it’s true that however we see it, whether it’s master trusts, whether it’s single employer trust, there’s self-select options there, but there are not as many members taking up these options.”
Additionally, the debate touched on whether individuals prioritise ESG values when selecting employers, with some arguing that younger generations are increasingly drawn to organisations that align with their ethical beliefs.
This generational change could have long-term effects on how pension investments are structured, as companies may feel compelled to integrate ESG considerations more deeply into their schemes to attract and retain talent.
However others said that a company’s stance on corporate responsibility was less of a deciding factor than the job role and descriptions and of course the associated salary salary.
When it comes to engaging employees with ESG, consultants at the events suggested asset managers and providers improve the ‘storytelling’ around the tangible benefits of sustainable investments to encourage member participation.
Aston said: “One of the skills for providers going forward is going to be about communication to the membership, particularly in relation to the the impact those investments have had. I think you can absolutely see that the younger generation are going to buy into that story if it’s told in the right way.”
Most schemes — and trustees — hold to the fact that sustainable investments are likely to deliver superior returns over the longer terms, so for now will continue to pursue ESG strategies. But growing climate change and ESG scepticism from the US may impact shorter-term returns on some of these strategies.
With new VFM regulation focusing on performance metrics it remains to be seen how schemes balance these shorter and longer-term priorities, to deliver good retirement outcomes for members.
