Schemes missing £1.2bn ESG-led member engagement opportunity

Some 45 per cent of savers between 22 and 39 would be prepared to increase the proportion of their salary they save in a pension if they knew it was invested responsibly, according to the survey.

As UK pension schemes lead a $15tn coalition of asset owners holding carbon extractors to account, the study suggests environmental, social and governance issues can be a driver of value for money in addition to financial risks to be mitigated. 

Investing thoughtfully and responsibly should also help rebuild trust and confidence people have in financial institutions, allowing a culture of saving to flourish

Diandra Soobiah, Nest

The report, by asset manager Franklin Templeton and research company Adoreboard, used artificial intelligence to analyse millennial savers’ emotional response to open questions about their pension.

Fifty-one per cent of respondents said they believe responsible investment values should be built into the default funds through which most defined contribution savers are invested.

Of those who said they would pay in more to an ESG fund, 70 per cent envisaged an increase of between 1 and 3 percentage points, while 14 per cent would add an extra 4 to 5 per cent of salary to their pension every year.

Extrapolated across the UK’s 6.3m savers in the age bracket, an extra £1.2bn a year could be put towards their retirement.

Climate change was the issue about which savers felt most strongly, motivating 55 per cent of respondents. Animal welfare and excess plastic use rounded out the top three concerns.

“It’s very clear that responsible investing and the themes around this are a very emotive thing for people,” said David Whitehair, director of DC strategy at Franklin Templeton, adding: “We believe emotions drive change.”

DC savers’ retirement adequacy is often shown to be well short of advisable replacement rates, but Mr Whitehair said better communication about ESG could help change this.

“This report shows that responsible investment, just as a consumer term, could be one of the catalysts,” he said.

Contrary to many assumptions that pensions are mistrusted, the research revealed a stronger positive than negative feeling among savers toward their retirement pots, with pension providers even beating clothing retailers in the battle for consumers’ emotions.

However, only 22 per cent said they feel their pension is being invested responsibly. “It reflects my selfish values – ie. it is making me money – but I do not think it reflects my altruistic values,” one respondent said.

Schemes turn up heat on energy companies

This is despite the increasingly robust stances being taken by the UK’s pension trustees on ESG matters. In addition to an overwhelming majority of schemes reporting that they are ready to comply with new rules on responsible investment disclosure, a $15tn coalition of asset owners took on global fossil fuel companies on Tuesday.

The Transition Pathway Initiative, whose leaders include the Brunel Pension Partnership and the Church of England National Investing Bodies, renewed its engagement drive in response to a disappointing assessment of 109 energy companies.

Just 28 per cent of businesses assessed were in line with the commitments made by national governments to reduce emissions in the Paris Agreement, and just two of these – Shell and Repsol – are oil and gas companies.

Divestment campaigners have long argued that engagement with environmentally harmful companies is not delivering results fast enough, and the Franklin report could be interpreted to suggest savers will not react favourably to discovering their role as investors in polluting companies.

But Adam Matthews, director of ethics and engagement at the Church of England Pensions Board, warned against this interpretation of the TPI findings.

“The report does highlight that climate progress in the sector in general is too slow, but crucially it also shows that we are seeing the emergence of leaders within sectors who, despite the enormous challenge of overhauling their business models, are beginning to put transformational strategies in place to align their business with a pathway to Paris,” he said.

Mr Matthews noted the success of initiatives like the Climate Action 100+, which pushes companies to disclose to investors how climate change will impact their business. While change is currently too slow, he said “engagement still has a major role to play in achieving this”.

In an industry where members are typically inert, effective communication about the lengths to which trustees address ESG can be tricky, but it may still be worthwhile.

Seventy-eight per cent of respondents to the Franklin Templeton survey said they would engage more with their statement if it focused on responsible investment issues, while more than half wanted an app to deliver this information.

“There’s a lot of work already being done by schemes and investment managers around these issues, but there’s a failure in communicating these things to members,” said Mr Whitehair.

Nest grasps opportunity

The signs are that scheme attitudes are changing. Master trust Nest has made significant announcements about its stance on ESG, including on the positive impact of its new private debt mandates.

“Our move into private credit, investing in infrastructure projects such as wind farms, is a great way to help bring pensions to life by giving tangible examples of the impact member savings can have. Investing thoughtfully and responsibly should also help rebuild trust and confidence people have in financial institutions, allowing a culture of saving to flourish,” said Diandra Soobiah, Nest’s head of responsible investment.

“We’ll continue to promote our investment strategy to our members. Our annual Responsible Investment report helps explain the benefits of our investment approach and keeps them informed of big announcements, such as Nest’s decision to go tobacco-free across our portfolio. We also undertake an annual member survey asking for their views on our investment activities,” she added.