How to integrate ESG-focused default investment funds with your organisation’s wider sustainability

You only have to watch the news to know that concern for the planet and how we treat it is at an all-time high. From Greta Thunberg crossing the Atlantic in a zero-emissions sailing boat to climate protestors gluing themselves to bridges in central London, this a hot topic.

Against this backdrop, over the past 15 or so years, environmental, social and governance (ESG) investing has moved from a niche strategy to mainstream investment practice.

But, first things first, what is ESG investment?

It’s responsible investment

By considering ESG factors, a fund is investing responsibly, managing risk and using your money to make companies change their practices for the better. ESG investment is also based on the belief that ESG factors are financially significant.

That’s where ESG investing differs from ethical investment, which is more about moral and ethical considerations and judgements, rather than investment considerations.

ESG investment focuses on encouraging good practices at a company, scrutinising things like:

the proportion of women and minorities it employs
whether it pays the UK living wage
its energy efficiency
its transparency on tax and business practices
its relationships with stakeholders and shareholders.

The number of funds taking ESG considerations into account has risen massively in recent years because these issues increasingly matter to people – including your employees.

Offering ESG investment dovetails with personal values and concerns

Offering a fund that considers ESG factors is likely to bring you more into line with your employees and their personal values. More and more of us are applying our values to the way we use our money. This could be by donating to good causes or buying goods and services from companies working to make the world a better place.

And if your employees are doing that for small purchases, why wouldn’t they want to do the same when it comes to the money they invest in their pension?

For many people, their pension pot will be the largest amount of money they will ever save. By offering ESG funds or a default fund that takes ESG factors into consideration through your pension scheme, you’re helping your employees to make a positive long-term impact.

Taking a responsible stance doesn’t mean sacrificing performance or returns

Once upon a time, investing with ESG issues in mind was considered riskier than investing in the usual type of funds. That’s no longer true. Now, fund managers have a wider choice of stocks to invest in, meaning they can spread the risk more easily, just as with traditional investments.

Academic and industry studies conclude that incorporating ESG considerations can generate long-term, risk-adjusted returns, provide better downside protection and reduce the volatility of returns.

Offering the right kind of choices leads to better engagement

You may offer your employees the option to choose their own funds – including ESG funds – through your pension scheme. If you do, that’s brilliant. But many people don’t feel confident enough to choose one investment over another. Offering a default ESG fund takes away much of the fear for people who want to use their money for good, but are not sure of making the right choice for them.

A default ESG fund can make your people feel they are in control of their pension and feel more engaged with an employer offering them a scheme with such an option. Research also shows that investing responsibly and sustainably is good for business. So, offering your employees an ESG default fund could also ramp up the feel-good factor in your firm. As an added benefit, it may make your employees take more of an interest in their pension.

An ESG default fund can sit comfortably alongside your other sustainability goals

As part of your corporate responsibility strategy, you may have sustainability goals, such as:

reducing the amount of waste your business sends to landfill
reducing carbon emissions
becoming more energy efficient
eliminating single-use plastic from your workplace.

Adding an ESG default fund to your pension scheme fits in perfectly with these goals. It reinforces the message you’re sending to your employees that you care about the planet and you’re serious about changing things for the better.

And there’s evidence to suggest that your employees expect you to take a stand on important issues. The Edelman Trust Barometer 2019 found that:

58% of employees say they look to their employer to be a trustworthy source of information about contentious societal issues
67% of employees expect prospective employers will join them in taking action on societal issues
76% of employees say they want CEOs to take the lead on change instead of waiting for government to impose it.

So why not give your employees the choice to put their pension pot into a fund that considers ESG issues when investing? It could be a very smart move all round.

The author is Zelda Bentham, group head of sustainability at Aviva.

This article is provided by Aviva.