Editorial: Applying environmental, social and governance factors to investment is no longer the obscure practice of a handful of believers.
Pioneers such as the Environment Agency Pension Fund or mastertrust Nest will have devoted the most time to thinking about ESG, but regulatory pressure is ramping up and could soon force more schemes to do likewise.
Earlier this year, the government said it was “minded” to introduce mandatory trustee statements on ESG; last week, the issue received fresh impetus when the chair of the Environmental Audit Committee wrote to the 25 biggest UK funds to ask how they manage the risks climate change poses to pensions.
Investors who think long-term will need to factor in ESG as a financial concern, but among trustees the question of ethics is still often pulled into the debate. This can confuse things, as it is unclear whether trustees are applying their own ethical views or those of members, and if the latter, which members.
Investment professionals often point out they are agnostic about the ethics of their investments and purely concerned with risk; and this might suit pension funds well when it comes to the environmental and governance part of ESG.
But a panel at last week’s Investment Conference organised by the Pensions and Lifetime Savings Association found this works much less well when it comes to social factors.
The conclusions of research into this are disheartening: companies with poor social practices tend to outperform, said Macquarie’s head of fixed income research Dean Stewart. An example of a high-performing sector with poor social credentials is the tobacco industry.
At another panel at the conference, the important point was made that past performance is not an indicator of future success.
The fate of industries like tobacco could turn – primarily due to governments imposing bans and, in future, potentially clawing back some of the health costs associated with smoking, said Nest’s chief investment officer Mark Fawcett.
It seems after all that investors who care about their future returns cannot escape the three letters for very much longer.
Sandra Wolf is editor at Pensions Expert. You can follow her on Twitter @SandraCWKand the team @pensions_expert.
