Attitude shift means pensions are prioritising ESG

New regulations from the FCA have influenced how pension trustees think about sustainability issues

The pension industry is increasing its commitment to ESG investing as new regulations push sustainability issues to the forefront of pension scheme agendas, analysis from Dunstan Thomas suggests.

The company, which provides business and technology solutions to the financial services, said evidence points to a shift in attitude amongst Defined Benefit pension schemes who have traditionally been reluctant to embrace ESG investments.

“Anecdotal evidence from the Defined Benefit pension world suggests that most pension trustee boards no longer believe that operating a bias towards investments with strong ESG ratings will negatively impact scheme performance and many are now expecting that ESG bias to help improve risk-adjusted returns,” Adrian Boulding, director of retirement strategy at Dunstan Thomas said.

The shift follows new ESG regulations set to be imposed on the pension industry by the Financial Conduct Authority (FCA) in October.

The regulations state that Independent Governance Committees (IGCs), which oversee the value for money of workplace personal pensions, must report on all ESG issues, consumer concerns and stewardship for the pension schemes they oversee, and ensure ESG issues are fully considered as part of their wider investment policy.

Boulding added that the industry is starting to recognise that ESG-positive investments are likely to outperform those that don’t take ESG factors into consideration.

“Companies that embrace concepts such as diversity will be better equipped to outperform rivals that stick with dinosaur-like business practices,” Boulding said.

However, he added pension providers must have open dialogue with stakeholders and investors about their ESG investments.

“It won’t be enough to simply adopt ESG into the investment decision process, it will become just as important to communicate what’s being done here to scheme members and other stakeholders.

“I expect to see a pension provider’s ESG credentials at the fore of member communications and becoming a genuine stimulant (or detractor) for increased contributions from savers,” Boulding commented.