Investing in a pension and buying a new car are, in some ways, similar. You generally do not want to know too much about how it works, you just want it to give you the best mileage for your money.
Scheme members do not need to know the ins and outs of how pensions work. But those looking after their money should know that getting better long-term risk-adjusted returns is down to their investment management process. Incorporating environmental, social and governance factors into that process contributes to achieving this.
Responsible investors should engage with companies to help them deliver sustainable long-term profits
Responsible investors should engage with companies to help them deliver sustainable long-term profits, which is essential for the growth of members’ retirement pots.
It is important to consider both the implications of a company’s product as well as its practices. While the product might seek to do good and provide a solution to a worldwide problem, a company’s behaviour could undermine and negatively impact its bottom line.
Take Volkswagen, for example. In response to growing concern about climate change, the company developed diesel cars specifically promoted as having lower emissions controls.
As we now know, Volkswagen’s emission control software was deliberately defective. In fact, some of its diesel-powered vehicles’ emissions could have been more than 40 times above the legal limit in the US. The company suffered serious reputational damage and was forced to set aside €16.2bn (£14.1bn) to pay for related costs.
The scandal also became the catalyst that focused attention on the negative health aspects of diesel emissions, which consequently affected the worldwide market of car manufacturing.
There is now a strong trend towards electric cars and some have predicted the ‘death of diesel’. New car sales for diesel models recently plunged 37 per cent, and at least one manufacturer, Toyota, has announced it will end production of diesel passenger cars for the European market.
Regulation across most industries is leaning more towards environmental awareness as an essential part of ‘clean business’ models, and smart investors are now incorporating this trend into their decision-making.
The commitment from Toyota, to end diesel production and generate half its global sales from hybrid or electric by 2030, and its carbon reduction trend means that this car manufacturer, as well as others, are overweight in Nest’s climate aware fund.
The fund also applies a negative ‘tilt’ to reduce investment in businesses that are heavy carbon emitters or simply not making the changes needed. It does not exclude any companies but we try to positively influence them, by engaging with them and using our voting rights.
A strong focus on ESG keeps members driving safely into retirement for many years to come, with fewer bumps along the road.
Diandra Soobiah is head of responsible investment at mastertrust Nest
