Pension members could be the answer to more ambitious responsible investment strategies

The pension industry is making slow but steady progress on responsible investment. New legislation has boosted action on the issue, as it requires trustees of pension schemes to incorporate environmental, social, and governance (ESG) concerns into their investment strategies. However, legislation rarely leads to innovation. Members could be the answer to thinking about the impact of pensions. 

Investing in the future

‘Past performance is not an indication of future performance’, is written all over financial documentation as a risk to readers. Yet our pensions have the past in mind, invested largely in companies that have done well historically. Pensions, by definition, are for the future, so does it not make more sense to invest in the future in which members will retire? The world as we know it will be radically changed if financial actors don’t get behind the Paris Agreement goals.  

There are many different approaches to responsible investment, which can make it hard to know what to ask your pension provider. A great place to start is by speaking to members. Listening to what they care about and what they think. Surveys, workshops, focus groups and speaking to existing green/women’s/social groups in workplaces can be a good first step. Many pension schemes such as NEST are surveying their members, encouraged by the new legislation.  

Member insight

We would suggest staying clear of asking members if they would be willing to sacrifice returns for investing responsibly, as this re-enforces the myth that savers will take a cut for doing good. Instead, getting members to prioritise different issues they care about – the environment, or human rights – is tangible information, which can be used by pension providers. 

Insight into member views provides questions for pension providers or asset managers on their stewardship activities, ie how they’re talking to the companies in which they invest.

At ShareAction, we consider best practice stewardship to have three aspects:

1) Policies include actions such as voting shares in support of ESG resolutions.

2) Managers have an escalation policy for when engagement is not working.

3) Engagement is recorded and examples of successful engagement provided.

The wider benefits of ESG investing

Responsible investment is about financial risks and opportunities, and there are many products available now which incorporate ESG and climate factors. With defined contribution savers taking on the risk of their pension investments, these products reduce exposure to companies with low ESG or carbon scores, thereby reducing risk to controversial companies. Asking pension providers whether these products can be incorporated into defaults is what ShareAction considers best practice. 

Lastly, if you work for an organisation with a strong social purpose it may be worth considering not investing in certain sectors or investing in social impact. Social impact is a growing area of interest for pension schemes. Pensions with purpose and Growing a culture of social impact investing in the UK have been spearheading the campaign. Putting just 1-5% of the pension portfolio into a social impact fund delivers excellent stories for members while diversifying pension pots.

Lauren Peacock, campaign manager at ShareAction.