Responsible investment – the demand awakens

By Ryan Medlock, Royal London’s Senior investment development and technical manager

To understand more about this we carried out an extensive programme of research during the summer of 2020. This included desk research to review existing consumer and adviser insight as well as both qualitative and quantitative research practices that threw up some compelling conclusions. So what did we find out?

The growing importance of responsible investment

There is growing demand for more transparency from companies around their business practices, ranging from how they treat their employees, tackling diversity in the boardroom or implementing circular economy policies. Some of this has been accelerated by COVID-19 and how businesses have responded. Those that responded well to the pandemic in terms of how they looked after employees, and supported their local communities in this period tended to be the ones that were rewarded by shareholders and that isn't something that would have necessarily happened five or even ten years ago. We are seeing a shift which is translating into changing attitudes from customers and an increased focus on environmental, social and governance (ESG) factors. 

As we emerge from the COVID-19 crisis, 58% of the general public want to see climate change and climate mitigation policies prioritised by Governments¹. But climate change isn’t the only ESG item on the public wish list because prominent issues such as fair wages and modern slavery policies also appear within the top five issues that consumers want addressed.

When presented with Royal London’s definition of responsible investment, only 8% of consumers think it is not an important consideration². Conversely, that means 92% think it is.

This demand is also being experienced at an adviser level. 50% of advisers are already incorporating ESG considerations within their investment proposition with a further 37% actively considering its inclusion³. With a raft of new regulatory proposals on the horizon, it’s safe to assume this figure will only go higher. 

The knowledge gap

Despite this growing demand, engagement and knowledge of responsible investment remains incredibly low.

Three quarters of pension holders don’t know where their pension is actually invested⁴. This suggests that there is a real dis-connect between how individuals view their pension and their desire to make a positive social and environmental impact.  

Certain ESG issues and themes can be extremely emotive subjects for different individuals. Using responsible investment as a method to engage these individuals can not only increase their overall knowledge on responsible investment, but can also make them value their pension and investments in general. 

Bridging this responsible investment knowledge gap is not only a means of increasing engagement, it’s potentially an opportunity to increase pension contributions.

45% of workplace pension members say they’d increase their contributions if they knew their funds were being responsibly invested⁵. This is estimated to be worth up to £1.2bn in additional costs⁵.

Capturing the demand

There’s no doubt that COVID-19 has given responsible investing a sharper and more calculated focus. 82% of advisers have reported an uptick in interest from clients on ESG issues and responsible investing in general⁶. 

Regulatory rules and requirements coming into play at the end of 2021 will effectively force advisers to discuss ESG issues with their clients whether they want to or not. Our research tells us that the demand is very real and that it is growing.

People don't naturally connect their savings or their pensions with the ability to make a social or environmental impact but this is an area which is moving at pace and bringing this impact to life for clients can help advisers get ahead of the curve. As the demand awakens, this could turn out to be the pension engagement tipping point we’ve all been waiting for. 

Sources:

¹ ‘The Importance of ESG and corporate sustainability in a time of unprecedented challenge’, EY (2020)

² Royal London (2020)

³ Federated Hermes (2020)

⁴ Hargreaves Lansdown (2019)

⁵ ’The power of emotions’, Franklin Templeton (2019)

⁶ FE FundInfo (2020)