Environmental, social and governance factors should be a core element of schemes’ investment strategies, argues Redington’s Rob Gardner.
We need to communicate the financial benefits of integrating ESG into investing.
A sustained, holistic approach is essential to move ESG from ‘nice to have’ to a core part of all investment strategies
ESG is a great lens for managing risk and volatility over the long term. For example, in defined contribution, where members are younger and the time horizon is more than 40 years, there is a real need to think about these risks.
HSBC’s DC pension fund and mastertrust Nest have both embraced ESG in their default investment strategies. They invest in companies that focus on building long-term renewable energy solutions. At the same time, they reduce both investment and engagement with companies that have a poor road map to deal with a transition to a low carbon world.
Integrating ESG into investing for a pension fund achieves two goals. It can be helpful to society to ‘do good’, but can also be a way of managing the risks inherent in long-term investing. As auto-enrolment kicks in and pots grow even greater, this is going to become still more vital. The savings and investment industry has a responsibility to promote best practice whenever we can.
Are bond investors missing out?
Fitch Ratings found that 53 per cent of senior bondholders expected the financial impact on their investments from ESG risks to increase.
Research confirms that taking ESG factors into account does not detract from performance and may even boost returns. A study by Barclays found that ESG strategies can be applied to credit markets with positive results for bondholders’ returns.
There are currently many industry-run initiatives, besides the UNPRI framework, including Good Money Week, which aims to promote better practice in the industry, or ShareAction, which encourages pension schemes to consider human rights, business ethics and the environment in their policies.
Should ESG be a default for DC schemes?
From the blog: As we move further into 2017, everyone is making bold predictions about what the year will hold in terms of pensions.
Such campaigns are valuable, but a sustained, holistic approach is essential to push ESG to the next level when it comes to pension investing, moving it from ‘nice to have’ to a core part of all investment strategies.
We need to take action
As more and more members start their retirement savings journey, ESG strategies offer a real opportunity for the pensions industry to engage with its members, as was the case with the HSBC scheme’s investment in the Future World Fund and Nest’s addition of a climate aware fund.
Making ESG mainstream is not an easy task. Five years from now, the decision by HSBC and Nest to integrate ESG factors into their investment strategies will likely be the norm. We need to plan in decades and think in years.
Robert Gardner is a co-founder of consultancy Redington
