What kind of world do we want our children and children’s children to live in?
The decisions we make today are going to dictate what kind of world future generations will inherit.
A lack of action in the short term will have serious long term consequences. Trustees and the pensions industry have a responsibility and opportunity to use environment, social and governance (ESG) factors to seek better outcomes for members both in the short and long-term.
‘The returns we need can only come from a system that works, the benefits we pay are worth more in a world worth living in.‘
The Pensions Regulator’s (TPR) investment guidance expects trustees to assess the factors affecting the long-term sustainability of scheme investments. Climate change is one of these factors trustees need to consider and account for in the development and implementation of their investment strategy.
The UK government has recently reaffirmed commitment to international obligations with its Clean Growth Strategy and we have seen other major initiatives being passed around the world to combat the threat of climate change.
These are important steps. They demonstrate that integrating climate change awareness into the mainstream investor’s remit is not a ‘nice to have’.
In light of this, the recently launched Pensions and Lifetimes Savings Association (PLSA) guidance, More light less heat: A framework for pension fund action on climate change gives trustees practical, implementable advice.
The UK has so far been slow to embrace sustainable investments. One of the reasons is the belief that investing in ESG means giving up performance. This is not the case and funds can achieve better financial returns and better outcomes for members, while at the same time improving the world members will live in.
Applying ESG criteria to investments can be a great way to manage the risk and volatility that are inherent in long term investing.
Both HSBC pension fund and NEST have embraced ESG in their DC default investment strategies aiming to:
- grow members’ money over time
- respond to climate change risk
- influence positive change
These strategies include engaging with and challenging companies to demonstrate their commitment to a low-carbon world. Those who fail to demonstrate this may be excluded from the fund.
Attitudes are changing – according to research from the Global Sustainable Investment Alliance, 21.6% of assets under management in the US are now in sustainable investments. Across Europe, this is even higher at 52.6%.
There has been progress in the UK. In September 2017, Redington joined the AMNT, UKSIF and 11 other investment consultants in signing a public statement to raise awareness of TPR’s guidance on ESG to pension funds. Our consulting team are working with clients to raise awareness of ESG issues and to develop responsible investment within the trustee’s investment principles. In addition the manager research team assess each asset manager’s approach to ESG integration, across all asset classes, and provide this research to trustees as standard.
If your consultant isn’t giving ESG adequate attention, challenge them. Understanding ESG factors is a challenge worth taking on. It provides an opportunity to better your investments and improve member outcomes while preserving the wellbeing of the world we live in.
By Robert Gardner
Co-founder and Lead Investment Consultant, Redington
 Dutch pension fund. Source Roger Urwin, CFA roundtable.
 Friede, Busch and Bassen (2015) ESG and Financial Performance: Aggregated Evidence from more than 2,000 Empirical Studies. Journal of Sustainable Finance and Investment, 5:4, pp 201-233.