How to help members use their pensions as a force for good

Pension funds have tremendous financial clout – and members have an increased desire to align their investments with their ethics

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Over the last few decades terms, like net zero, carbon footprint and greenhouse gases have entered common vocabulary.

The exact definitions can be complex to define, but the frequency of use of these terms indicates an increased awareness of climate and environmental issues.

This has led to Individuals and organisations recognising the significance of aligning financial goals with ethical values. And their attention is turning to pension investments.

Pension funds which integrate environmental, social and governance (ESG) into their investment design are becoming more prevalent.

The power of pensions

The collective power of pension investments isn’t a new concept. Pension funds, by their nature, pool together the financial resources of many individuals and create a greater investment potential.

The combined value held in defined contribution (DC) pensions in the UK is projected to grow from £500bn to £1trn by 2030.

A greater interest in ESG inevitably leads a greater number of investment solutions. There are more ways than ever for individuals to choose investments in their pension that align with their values.

It’s all about making informed decisions that go beyond financial returns. And money saved in DC pensions has the potential to drive meaningful change.

Communicating ESG options

Communicating ESG investment options to employees isn’t easy. The first and most obvious hurdle to overcome is this dreaded three-letter initialism.

Like all good three-letter initialisms, an explanation is usually needed to understand the wider picture.

ESG refers to a set of criteria which investors or fund managers consider when assessing the sustainability and ethical impact of a company or investment.

The term ESG stands for Environmental, Social and Governance.

Each component of ESG represents a different aspect:

Environmental: Focuses on a company's impact on the natural environment. It includes considerations such as climate change, greenhouse gas emissions, resource usage, pollution, waste management and the company's commitment to sustainability practices.
Social: The social component looks at how a company manages its relationships with stakeholders, including employees, customers, communities and suppliers. It encompasses factors such as labour practices, human rights, diversity and inclusion, community engagement, product safety and data privacy.
Governance: Governance refers to the way a company is managed, including its leadership, transparency, accountability and shareholder rights. It evaluates the company's board structure, executive compensation, audit processes, ethics and compliance with laws and regulations.

It's always worth starting by clearly outlining the concept of ESG and its significance for sustainable and responsible investing practices.

Utilise straightforward language and relatable examples to break down any complexities associated with ESG criteria.

Present investment options within the ESG framework, detailing the companies, industries or projects that align with environmental and social values.

Incorporate visuals, such as infographics and charts, to make the information more accessible and engaging.

Provide resources like webinars, guides and FAQs to empower employees to make informed decisions that align with their personal values and long-term financial goals.

By prioritising clear, educational and engaging communication, employers can inspire employees to actively participate in ESG investment options and contribute to a more sustainable future. Remember though that all investments fall as well as rise in value, so investors could get back less than they invest.

Benefits for employers

Offering employees access to ESG investment options and communicating those options clearly can benefit employers too.

Here are four reasons why you might consider providing a wider investment choice for your pension offering. This is not personal advice. If unsure, please ask about advice:

1. Employee satisfaction and engagement

Providing ESG investment options demonstrates that the company values employee preferences and aligns with their ethical and sustainable values. This can enhance employee satisfaction and engagement, developing a sense of pride in working for an organisation that actively supports responsible investment practices.

2. Talent attraction and retention

Many jobseekers, especially among younger generations, prioritise working for companies that emphasise sustainability and social responsibility. Offering ESG investment options can make the company more attractive to top talent, aiding recruitment efforts.

3. Supporting employee financial wellness

ESG investments provide employees with an opportunity to not only grow their wealth but also invest in causes they believe in. By offering ESG options, employers contribute to employees' financial wellness by facilitating investments that align with their personal values, which can lead to greater financial confidence.

4. Enhanced corporate social responsibility

Companies that champion ESG investments are seen as responsible corporate citizens. Providing ESG investment options can enhance the company's reputation, showcasing its commitment to sustainability and responsible business practices. This positive perception can lead to increased customer loyalty and stronger relationships with stakeholders.