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15 Sep 2020

Three ways to align your workplace pension investment strategy with corporate values on ESG

Environmental, social and governance (ESG) investing has increasingly been of interest to many investors over the last few years, and has particularly grown in favour during the COVID-19 crisis. In fact, over this summer, British investors invested more in ethical funds than in the previous five years combined. This has been called the ‘Blue Planet’ effect (thanks David Attenborough)!

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Moreover, there is a growing body of evidence that ESG integration is not value-destroying and may offer a hedge against ESG risks, including climate change. UK pension funds are even gradually being nudged towards ESG integration through guidance such as that from The Pensions Regulator.

Taking these factors into account, you might be thinking it’s time to start aligning your workplace pension scheme investment strategy with your corporate values on responsible investment. Remember though that all investments fall as well as rise in value, so investors could get back less than they invest.

But where do you start? And what steps should you take before making such a large decision?

1. Review your corporate values

Most companies have a corporate social responsibility (CSR) policy anchored across the organisation, and can be widely understood across the spectrum of your workforce. Values like commitment to diversity and inclusion, managing environmental impact or societal initiatives all have a significant effect on the externalities of your operations, and can ultimately lead to the development of a values oriented organisation that works for the common good.

Many individuals want to work for companies that factor sustainable practices into their corporate values. A workplace pension investment strategy that caters to their workforce’s demands by providing an appropriate range of investment choices and factoring in ESG concerns, could benefit your reputation as a responsible business. In turn, these pension plans could be used as a tool to help attract, recruit and retain employees.

All this being said, you might wonder whether your employees are engaged enough with their pension to worry about whether your chosen workplace default fund matches their own ethical philosophy.

On the contrary, according to research carried out by Franklin Templeton, 45% of younger workers would be willing to put more in their pension pots if they thought it was going into responsible investments. And over half believe ‘responsible investing’ should be built into the default fund. This could result in £1.2 billion extra being added to pension pots, according to Franklin’s calculations.

What’s more, there are growing numbers of workers keen to fine-tune their sustainability practices across their home, travel and financial life. As such, it should not be a surprise that their workplace pension can come under fire for not being sustainable enough.

2. Assess your current provider and/or default fund

Just as individual investors have become savvy with their ESG investments, so too have a lot of investment fund managers, who are increasingly recognising the value of ESG and integrating the strategy into their investment processes in one way or another.

If your company has corporate values that motivate and are supported by employees, these could be influential in your employees’ desire to become more engaged in their pension pots. Figures like those from Franklin Templeton, combined with the rising importance of ESG across all investment markets, might have you convinced to assess your current workplace pension scheme investment strategy.

Once you’ve taken stock of the values that matter most to your organisation, it’s time to engage your current workplace pension provider in the conversation. Don’t be afraid to challenge your investment fund managers on any areas which don’t tie in with your corporate values. They should be transparent in their responses and provide in-depth information about where the fund invests, or doesn’t invest in. If your workforce are not sure which investments are suitable for their circumstances, they should seek personal advice.

3. Consider whether you need a new provider

If you scrutinise your current provider, and don’t receive an appropriate response, it could be time to start looking elsewhere.

It’s a common misconception that responsible investing aims to remove ‘sinful’ organisations from investments, such as tobacco companies or oil and gas corporations. But the concept of ESG is broader than that; in fact, there’s no formal definition for what an ESG fund should be. This makes it all the more difficult to assess the market and choose an appropriate fund that will align with your core values and keep your employees content with your choice.

Whatever your corporate values are, use them to help steer your decision-making when it comes to incorporating ESG fund(s) into your workplace pension investment strategy. It’s helpful to tailor themes around the three ESG pillars (environmental, social, governance) and keep these in mind when building up a picture of what you want an ideal investment strategy to look like. These themes can include:

  • climate change
  • energy management
  • water scarcity
  • human capital management
  • product safety
  • supply chain issues
  • community engagement
  • corporate governance factors.

Overall, it’s important to factor in values from stakeholders across the business. The choice of provider and fund will ultimately come down to the investment beliefs of you as an employer and your role as a representative of your workforce’s values.

This article is provided by Hargreaves Lansdown.

In partnership with Hargreaves Lansdown

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