Do pension providers invest their customers’ money in an ESG way they expect them to?
They haven’t always in the past, but more providers are starting to, and net zero commitments are a key part of this.
The reality is that most of our customers do not expect us to invest their money in a way that ignores environmental, social and governance (ESG) factors. In fact the great majority of pension scheme members expect us to be taking ESG factors into account in our investment decision-making as a matter of course. Our research has found 85 per cent of scheme members “expect Standard Life to consider how responsible all of their investments are, not just those labelled ‘responsible’ or ‘ESG’”.
For instance, providers that do not have a 2050 net-zero commitment risk falling short of that expectation.
But at the same time, only 19 per cent of members understand that their investments have an ESG approach applied to them. So there is a big education and communication challenge ahead of us to ensure they understand what we are doing on their behalf and how that reflects a responsible approach.
Is the industry’s language around ESG useful to members?
Generally speaking, no. Members are split between a small knowledgeable group of people keen to invest in line with their values, and a big majority who have little or no understanding of the subject at all. This latter group may see the issues as good versus bad, or right versus wrong, rather than as ESG or not ESG.
Our research has found that customers resonate with words such as ‘ethical’ and ‘climate’, but industry jargon such as ‘responsible investment’, ‘SRI’ and ‘ESG’ turns them off.
So we need to rethink the way we communicate ESG issues.
For example, when we talk about a three-stage approach of screening, tilting and stewardship, members understand this better if we use the terms ‘do more good’, ‘do less harm’ and ‘driving change for the better’.
We don’t necessarily need to change the name of the fund itself, but the language in the communications wrapped around it does need to speak to members in terms that resonate with them.
How should the industry define ESG?
Understanding of the concept of ESG, and its implementation, is maturing and evolving both at an industry level and amongst the public at large.
ESG is a complex area, particularly in relation to climate change, and we find people’s views can change radically as their understanding of the subject matter develops.
The debate over divestment versus engagement is a good example of this, where a headline statistic that a scheme has reduced its carbon emissions by a certain figure through disinvestment may seem attractive at first viewing, but a more informed understanding of the subject may lead to a view that engaging with carbon-intense companies and getting them to transform their business model can be more effective.
But even this debate will develop as the science changes, reporting of carbon evolves and members’ expectations evolve.
How should providers separate the moral aspects of ESG from the financial?
At the moment we have a lot of solutions that are unashamedly focused on financial risks of sustainability and ESG – and are not taking moral issues into account in defaults, although self-select options are there for those with strong views.
My sense is that we will see the customer voice articulating a trend towards a greater emphasis on moral considerations, rather than purely financial ones.
What is at risk if pension providers fail to meet members’ ESG expectations?
Trust is critical, and the industry has worked hard in recent years to rebuild faith in pensions. If we are found not to be doing what people expect of us, on issues as emotive as those covered by ESG, we run the risk of eroding that trust.
Transparency is key here – there are lots of good stories for the industry to tell – what we voted against, what we excluded, who we divested from. Sharing what we do will help drive trust.
Is the pensions industry at a tipping point on climate change?
Lots of work is being done by lots of organisations, and it is starting to pay off. For example, we’ve been working with the Institutional Investors Group on Climate Change (IIGCC) helping them develop their capabilities in helping organisations plan a clear, measurable path to net zero by 2050. And it is encouraging to see so many industry players signing up.
And November’s COP26 conference in Glasgow will build even more momentum. So it does feel like we are approaching a tipping point where ESG becomes mainstream, and this is starting to be reflected in what we are hearing from customers.