Pension schemes and members: Finding the common ground on ESG

LCP's Claire Jones encourages trustees to tap into investors' concerns on real world issues

Many people do not know where their pension is invested

Even more do not understand the impact that those investments are having on the world around them. This is something that the film director Richard Curtis wants to change.

On 30 June, with high profile supporters such as former Bank of England governor Mark Carney, he launched the Make My Money Matter (MMMM) campaign which has three asks for the pensions industry:

  1. Listen to savers, and explain how savers’ views and values have influenced their investments; 
  2. Play their part in tackling the climate emergency by making all pension funds at least halve their carbon emissions by 2030, and achieve net zero emissions by 2050 or earlier; and 
  3. Grow the amount of investment that is focused on having a positive impact on people and planet.  

A central part of the campaign is encouraging savers to write to their pension scheme, asking how their money is being invested, and what impact it has on people and planet.

See also: – The impact of covid-19 on pension schemes’ adoption of ESG

Pension schemes’ current focus on ESG

Over the last few years, UK pension schemes have been increasing the emphasis they place on ESG factors in their investment processes. The MMMM campaign will add impetus to this trend. It also has the potential to shift the conversations that trustees are having.

Currently, most pension trustees focus on the implications of ESG factors for investment risk and returns, consistent with their fiduciary duty to act in members’ best (financial) interests. This tendency has been reinforced by recent changes in investment regulations that require trustees to have a policy on how they take account of financially material ESG factors, whereas it is optional to have a policy on taking account of ESG factors for non-financial reasons.

The EU is in the process of pushing ahead with various sustainable finance regulations that bring in a third dimension: real world impact. However, at the moment, it looks as though the UK will not follow its lead. Will MMMM change that?

Dialogue between trustees and members

In the first round of discussions, I think pension scheme members and trustees could find plenty of common ground:

  • Members want to know how their savings are invested. Following recent legislative changes, trustees are required to publish their investment policies and, for defined contribution schemes, how they are implementing these policies.
  • Members want to understand the trustees’ position on environmental and social issues, including climate change. Trustees who are fulfilling their duties in this area will already be able to explain steps they are taking to address this.
  • Trustees want members to engage with their pension and potentially to save more. If the trustees succeed in communicating their approach well and building members’ trust in the scheme, this could help them achieve wider member engagement objectives.

The challenge will come where the common ground ends or if it is not found in the first place. It seems likely that many members’ starting point will be that they do not want to be invested in certain types of company – tobacco companies, weapon manufacturers, fossil fuel producers and so on. Yet many pension schemes will be invested in these companies, often for good reasons.

This underscores the importance of dialogue, for trustees to clearly articulate their position, but also to listen to members’ views and be prepared to shift their position if appropriate. As members learn more about the divestment versus engagement debate, they may accept that remaining invested in (some) oil and gas companies can be an effective climate strategy. In other areas, trustees may gain a deeper understanding of sustainability trends and shifting consumer attitudes, prompting them to re-assess the financial case and strengthen their ESG policies accordingly, for example by making a specific allocation to an impact investment fund. And when it comes to companies in “sin” sectors where there is little prospect of them ceasing the production of which members disapprove, the dialogue could help to build the evidence of member views that trustees would need to have before allowing for non-financial factors in their investment decisions.

A shift in emphasis towards non-financial factors and impact?

MMMM’s call to invest UK pensions to build a better world is also likely to spark more trustee interest in the real-world impact of investments. It could also encourage trustees to reflect more deeply on the interconnected world we live in, and how the real-world impacts of their investments will in turn have impacts on financial markets and hence the long-term sustainability of their financial returns. This more holistic interpretation of ESG, if incorporated into investment practices, would support better functioning of the financial system and hence better outcomes for savers – not to mention society – in the long run.

Actions trustees can take

In the meantime, trustees should ensure they are ready to start a dialogue on ESG matters:

  • Implement ESG policies that fulfil their fiduciary duties to members – for example, appoint managers with strong ESG credentials, invest in strategies that embed ESG into the investment process, and monitor how the managers are addressing ESG factors in practices.
  • Develop a comprehensive climate change strategy – identify and assess climate-related risks and opportunities to their scheme, agree a strategy for managing these risks and opportunities, devise metrics to monitor climate-related exposures, and set targets to improve exposures over time.
  • Articulate the scheme’s position on ESG topics

Trustees can then decide whether to be proactive in starting that dialogue, perhaps through conducting a member survey, setting up focus groups, holding a member event, or inviting questions through the scheme website or newsletter.

Even if they prefer not to invite questions directly, I encourage all trustees to ensure they are communicating information on their ESG practices to members in an accessible way and tapping into members’ deeply-felt concerns about real-world issues, to help them better understand their pension scheme and its investments.

Claire Jones is partner and head of responsible investment at LCP and editorial panellist for ESG Clarity


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...