Align your pension investment strategy with your corporate values

Is your pension scheme on a path to a more sustainable future, in line with your company?

Environmental, social and governance (ESG) factors and climate change have received increasing attention in the corporate world over the last five years.

Your company has probably taken steps to improve its ESG credentials – perhaps they've committed to a net zero carbon emissions target, maybe they’ve introduced new diversity, equity and inclusion policies, or perhaps they've paid closer attention to social factors like modern slavery.

These are all positive steps – but has your defined contribution (DC) pension scheme’s investment strategy kept up?

There are several factors pushing companies (and pension schemes) towards improving their ESG profile:

Companies

Regulatory change

TCFD (the Taskforce on Climate Related Financial Disclosures) is now a requirement for many companies. We expect further sustainability-related regulations to be introduced in the coming years to help the UK reach its net zero targets and transition to cleaner energy sources.

Financial resilience

Adapting to a changing world is essential for the long-term financial success of any business. Therefore, it is essential for companies to adapt to the changing climate and to prepare for the transition to renewable energy. Other ESG risks also pose a financial threat to firms and should be identified, mitigated, and managed like any other risk.

Moral duty

Executives may feel they have a sense of moral purpose to ensure their companies are not doing material damage to the world.

Societal pressure

Consumers are now more conscious of the ethics of the companies they buy from. Social media allows news of a corporate scandal to travel fast and for action groups to mobilise quickly to boycott certain companies or sectors.

Pension schemes

Regulatory changes

Trust-based schemes must set out their approach to ESG in their statement of investment principles and produce an annual implementation statement. Larger schemes are also required to produce TCFD reports, with further sustainability reporting around biodiversity and social factors potentially on the horizon.

Financial resilience

Pension schemes are long-term investors and need to generate long-term returns for members. The companies they invest in need to be able to deal with ESG risks and be well positioned for the energy transition.

Moral duty

Pension schemes hold millions of pounds of assets, and the deployment of this capital has the potential to have an impact on the world.

Societal pressure

We are beginning to see more requests from members of pension schemes for sustainable investments in their scheme. This is likely to grow as awareness increases.

Default strategy

With all aspects of a company’s business coming under increasing scrutiny (and in some cases contracts being won or lost partly on a company’s ESG practices), there has never been a more important time to consider the sustainability of your default strategy.
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Many of our clients already consider the way their pension scheme’s investments align with their sponsor’s wider policies on sustainability and climate change.

Increasingly, clients have started to invite their company’s sustainability teams to present to the trustees or governance committee to outline their current policies and future plans.

This has led to informed and inclusive discussions about how the investments of the pension scheme shape up against the company’s policies and goals in this area.

For some clients, we’ve seen a genuine desire to better reflect the values and goals of the company within the pension scheme.

We’ve been able to explore the funds and strategies that are currently available to DC pension schemes which might bring our clients and their organisations’ policies closer together.
Some have directly changed the investment strategy of their default arrangements off the back of this.
Some have wanted to go even further and to work with their fund managers to explore whether more bespoke strategies could be built to enable greater alignment with specific ESG themes.

If you’re not doing so already, we challenge you to assess how well your own pension scheme aligns with the sustainability and climate goals of your sponsor – and to be bold enough to make changes where you believe this is the right thing to do. The first steps to this could include: