The Pensions Policy Institute (PPI) has called for pension schemes to recognise a broader ESG focus to ensure risks are properly managed on behalf of members.
Its latest report, Engaging with ESG: Environmental, Social and Governance Factors, explores the way in which pension investment strategies take into account a wide range of environmental, social and governance (ESG) factors, to consider future opportunities, challenges and improve risk mitigation.
It says that for some time much of the focus on ESG has been skewed towards climate change. The PPI says this is unsurprising given this has been at the forefront for both policymakers and society more broadly, as the frequency of extreme climate events and climate change protest movements increase, and the pressure to take action on climate change grows.
However, it says this heavy focus on climate change has, at times, left other ESG factors overlooked.
PPI senior policy researcher Lauren Wilkinson says: “Events over the course of 2020 and so far in 2021 have emphasised how rapidly social and governance factors and societal attitudes surrounding them can evolve and come to the fore.
“Issues around public health, equality and labour practices have received increasing attention, accelerated by the Covid-19 pandemic, equality movements such as Black Lives Matter, and corporate insolvencies and court rulings against companies such as Asda and Uber. These social movements emphasise the importance of pension schemes’ investment strategies being flexible and proactive in the way that they approach ESG considerations.
“All those who are involved in designing and implementing schemes’ investment strategies need to have a good understanding of the way in which these factors can have a financially material effect on outcomes, if they want to avoid putting member contributions at financial risk. Initiatives that have already been successfully employed to improve integration of climate change risks may offer lessons as other ESG factors become more significant. However, schemes may need more support to improve their knowledge and understanding, especially regarding social factors and the way in which available data relates to their own investment strategy.”
The report looks at ways that pension schemes can braoden their ESG focus. Julian Lyne, Chief Commercial Officer at Newton Investment Management, says: “UK pension schemes are under increasing regulatory pressure to consider ESG factors in their investment decisions, and to report on how they have done so. As this report identifies, schemes recognise that their work to meet those responsibilities has further to go.
“Following a year dominated by the global pandemic and other events which have accelerated the consideration of ESG norms, there is no better time than now for schemes to build on the work they have done around climate change when considering ESG factors more broadly in their investment strategy. As active asset managers, we are committed to engaging with schemes purposefully to help them meet these ESG-related obligations.”
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