With interventions from government putting increased pressure on schemes to consider environmental, social and governance factors, trustees must not dismiss ESG as a fad, says Redington's Lydia Fearn.
As a concept, ESG investing has been around for some time. Every so often it has had its moment in the spotlight before disappearing into the shadows along with other so-called ‘investment fads’.
This may be because it has often been seen – rather unfairly – to be for those who are 'tree-huggers', or who believe allocations should align to their values and ethics over returns.
Greater transparency and the increased availability of company-level ESG data is also key
But there are some very compelling reasons to suggest integrated ESG investing is more than just the investment fad of the moment.
Regulatory pressure building
Firstly, we do not believe that you must sacrifice returns in order to invest in responsible and sustainable companies.
But perhaps the most important development is the intervention by the Department for Work and Pensions.
A recent DWP consultation said trustees will be required to update their statements of investment principles to reflect how they take account of financially material considerations, including ESG and climate change specifically, by October 2019.
Why does this matter? For a start it puts ESG firmly on the radar of pension trustees and investors, helping move it from the periphery to the mainstream.
While it is entirely plausible that some trustees will see this as nothing other than a box-ticking exercise to satisfy the new regulations, it is hoped most will make a concerted effort to put ESG at the heart of their process.
Better information needed
Greater transparency and the increased availability of company-level ESG data is also key. The granularity and processing of ESG data continues to improve and will in time become cheaper and easier to collect.
As ESG data becomes increasingly more consistent and reliable, our ability to interpret and analyse it to make good investment decisions will also improve.
However, we accept that better, more in-depth data, will take time. It is important, when considering investment solutions that integrate ESG, that you understand and agree with the methodology being used.
Different investment managers and index providers use different methods of judging companies against their ESG criteria.
Scheme interest picking up
There are signs that trustees and investors are already beginning to wake up to the benefits of integrating ESG within the investment process.
Over the past 12 months the conversations we are having both internally and externally about ESG have picked up considerably – both from a defined benefit and defined contribution perspective.
Initial conversations focus on what ESG means for trustees, and what their investment philosophy is when considering ESG alongside other investment risks.
We believe that in time ESG will no longer be seen an optional consideration, but a vital one. And that day may come sooner than we think.
Lydia Fearn is head of DC and financial wellbeing at consultancy Redington
