Investing
How can pension schemes align with ESG goals?
Global Banking & Finance Review®
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Pension schemes are aligning with ESG goals by engaging with asset managers and focusing on sustainable investing to meet member expectations.
By Tracy Walsh, partner in the pensions team at law firm Womble Bond Dickinson
Tracy Walsh, partner in the pensions team at law firm Womble Bond Dickinson
Pension schemes and the industry as a whole are responding to the zeitgeist of ESG investing. Last year, the Universities Superannuation Scheme, the UK’s largest pension scheme, announced that by 2023 it will have divested from companies involved in tobacco manufacturing, coal mining and weapons manufacturers, where this makes up more than 25% of their revenues.
The government has chosen not to impose targets onto pension schemes and is instead hoping that all schemes can learn from the actions of some larger schemes like this that have set ambitious ESG investment strategies, and in particular those that have voluntarily adopted net zero targets for their investments. Pension schemes will need to engage much more with their asset managers, understand what net zero really means, and be prepared to better interrogate their managers over their fund selection and how this is being monitored.
That will require Trustees to be more clued up, and to have a much different investment strategy, than perhaps they have been in the past. But the effort is likely to be worth it, for their scheme members. ESG investing is proving to be very attractive to millennials (Trustees may be surprised by just how many of their members fall into that bracket), and is bucking the assumption that ESG investing means lower returns.
Research from Bloomberg has shown that the average ESG fund fell in value by just half the decrease registered of other funds in the S&P 500 index over the same period during the Covid-19 crisis. All of which is good news for DC fund values, and also for DB schemes that are seeking to rely less and less on the employer going forward.
Trustees should not focus solely on the “E” in ESG though. The social credentials of companies seeking investment are just as important and it seems that those companies with solid scores in their area have also performed better during the pandemic, and members will likely expect further and better particulars from their schemes about how those scores are arrived at, and how it has shaped the investment strategy for the scheme.
So how can trustees ensure that managers engage positively with investee companies on their behalf? There are some key actions Trustees should take, in order to exercise the right degree of influence and accountability among their fund managers:
The article discusses how pension schemes can align with ESG goals, focusing on sustainable investing and asset manager engagement.
Trustees should clearly state their ESG positions in their SIP and risk register and require managers to be signatories of the UK Stewardship Code.
ESG investing is attractive due to its potential for competitive returns and its appeal to younger generations like millennials.
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