New regulations will soon require pension schemes to formally disclose how they have taken account of ESG factors, including climate change, in their investment strategy. However, our new report with the Pensions Policy Institute (PPI) showed many trustees are still confused around the best way to approach this.
The report, which sought the views of pension scheme providers, trustees, IGCs, asset managers and investment consultants, raised concerns over the lack of definition for ESG, citing that there was confusion as to its meaning and purpose. While some schemes canvassed believed in the positive effects of ESG, many still related this to making ethical judgements and did not see a connection between these and risks and returns.
Redington believes this confusion could be contributing to some schemes delaying moving forward in integrating ESG into investment strategy, despite increasing obligations from the DWP to do so.
Honor Fell, Redington’s Responsible Investment lead said: “Our report with the PPI has shown that, despite increased regulation, many schemes are still confused by what ESG really means, conflating this with social impact, sustainable and ethical investments.
“In 2016 we made ESG one of the main criteria our manager research team assesses as we believe stronger ESG practices deliver better long-term performance for clients. There are some excellent examples of pension schemes who are already doing this including HSBC and NEST. But it’s clear that in order to help more schemes take this seriously and avoid potential legal and performance issues, we need to work harder to define what ESG means to them and why it is important.”
Despite these concerns, we believe that the pensions industry will see an exciting new wave of innovative ESG integrated solutions coming to market.
Lydia Fearn, Head of DC & Financial Wellbeing at Redington, said: “Whilst we know a number of schemes still need to consider their position on ESG, we are seeing some of the larger schemes take the lead and set positive examples of how this can be done. These schemes have developed creative new solutions and will soon be implementing their strategies.
“This is a very exciting step forward. We have seen the new regulations pushing the agenda for trustees and we believe we will start to see more and more schemes, no matter what their size, having access to market leading ESG integrated solutions.”
Redington also highlighted the potential engagement opportunities that these new solutions offered.
“It could become a very interesting and real way to engage with members,” said Fearn. “Children from a young age are learning about recycling and taking care of their environment – it makes complete sense from an investment perspective that we should be protecting our assets in this way. Climate is a great starting point but we are seeing wider integration of the Social and Governance factors. With new products soon to be available, schemes should be in a better position to choose an investment strategy that is right for their scheme and their members.”
Press Release MRM Contact Sophie Mayall 0203 326 9900