Why ESG knowledge is pensions power for DC members

When employees know they can influence businesses for the good through their investments, they feel more engaged with their pensions

After the turmoil caused by the Covid-19 pandemic, the cost-of-living crisis and soaring inflation, expecting UK workers to prioritise their pensions could be an unrealistic demand.

Yet research by LGIM suggests that when people understand that their pensions can help influence some of the most critical factors affecting their lives, they are generally keen to engage.

Most of the 3,634 UK Defined Contribution pension members in the accumulation phase surveyed by LGIM know their pension savings are invested. They also know that this means they own little bits of companies and that, collectively, pension funds own large parts of businesses (with 68% saying they were either very or vaguely aware of this).

And when they know that their pension money can be used to encourage companies to behave better in terms of their ESG practices, 84% of its DC members say they would have wanted to be more involved in their pensions if they’d known it was being used to drive positive ESG changes.

Environmental worries

In terms of the environmental issues that most concern DC pension members, 84% worry about pollution of rivers, lakes and seas, 82% worry about biodiversity loss and 80% say they worry a fair amount or a lot about climate change.

Our DC members also worry about the loss of tropical rainforests including the Amazon (79%), and air pollution (78%).

The overuse of antibiotics is on the minds of a lesser amount (69%), but this might change as the risks of antimicrobial resistance and familiarity with the term itself continue to gain traction in the media.

Awareness of net zero continues to grow and 85% of our DC members say they’ve heard of it, despite no significant change in members’ understanding of how it’s relevant to their pension.

However, most DC pension members now seem to appreciate the link between burning fossil fuels and global warming so that almost nine in 10 (87%) want their pensions to significantly reduce their exposure to fossil fuels.

How DC members want to use pension power

For LGIM’s DC members, the most popular course of action is to use the power of pensions to work with companies to change poor ESG behaviours. But, if persuasion isn’t successful, members are happy to see their pension provider walk away from these companies.

For example, more than half (55%) of members would like to see their pension provider engaging with companies on improving their environmental practices and only withdrawing from them if this doesn’t work, compared with 33% who would prefer to avoid companies with a poor environmental record altogether.

Members are slightly less forgiving of companies which aren’t performing well in terms of their social practices, such as their record on modern slavery. Less than half (45%) think their pension provider should keep investing with them to effect change and only divest if they don’t improve. But 43% wouldn’t want their provider engaging with companies with a poor social record at all.

Raising awareness brings engagement

The global economic and political turbulence of recent years has left many people feeling battered, bruised and concerned about where the next financial shock might come from.

Yet LGIM found that knowledge is power when it comes to understanding how pension investments may offer savers a way to influence events they might previously have considered beyond their control.

Once pension members understand how their investment funds link to wider environmental and societal issues through the power of shares, most become more interested in their pensions.

DC members generally appreciate simply being kept in the know, with 65% saying they’d feel more positive about their pension provider if they were kept informed about how the provider was using the investor rights that come with managing pension funds.

For example, despite a conclusive 72% of savers supporting investments in infrastructure projects to increase renewable energy sources such as wind farms or solar parks, well over half (56%) would only back paying higher fees if there was no long-term impact on their pension pots.

However, LGIM believes that responsible investing is essential to mitigate risks, unearth investments opportunities and strengthen long-term returns for those who invest with it – and its research has shown time and again, that once pension savers understand the principles behind responsible investing, they feel more comfortable with having these principles incorporated into the decision-making process around how their pension funds are invested.

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Legal & General Investment Management (LGIM) survey in June 2023 of the views of 4,678 defined contribution workplace pension members on environment, social and governance investing. Respondents were split across generations and genders and across the UK and Ireland. This article refers to UK data for those in the accumulation phase.