Research from investment management firm Invesco published today (June 10) found many savers favour responsible or ethical investments even if it means smaller returns.
The study, which surveyed 500 pension scheme members, found that 82 per cent of savers would favour part of their pensions automatically going to a company which meets a certain ethical standard, compared with 18 per cent who saw this as a bad idea.
Almost half (46 per cent) of DC scheme members said they would be more likely to pick a fund that only invests in socially and environmentally responsible companies with returns of 6 per cent per year rather than a fund that includes all types of companies with returns of 6.5 per cent per year.
If both funds delivered the same historical returns of 6 per cent, 60 per cent of DC members surveyed would rather invest in the responsible option.
Stephen Messenger, UK institutional sales director at Invesco, said: "The fact that a significant proportion of employees are willing to sacrifice slightly lower returns for funds that invest in socially and environmentally responsible companies clearly highlights that responsible investment is a priority for employees.
"We expect a growing number of schemes to continue moving towards integrating responsible investments into their investment processes, and it is an item that will be at the top of trustees’ agendas."
But Invesco also found that although ethical investing is also known as environmental, social and governance (ESG) investing in the industry, the term "ESG" is unpopular with scheme members.
Invesco found that responsible investment was the preferred term for 42 per cent of respondents, with 30 per cent favouring the phrase ethical investment, compared to 14 per cent who preferred the term ESG.
Gary DeMoss, director of Invesco Consulting, said: "The fact that only 14 per cent of respondents prefer the term ESG clearly highlights the communication challenge pension trusts face; this has been amplified by the overuse of industry jargon.
"At a time when it is crucial to encourage employees to think about their financial futures, it has never been more important for schemes to carefully consider their engagement strategies to improve conversations."
The study also revealed a preference for positive language when being informed about responsible investments.
More than three quarters of respondents (77 per cent) believed that the best way to talk about a responsible investment was by describing it as a fund that "invests in companies that meet standards for doing environmental and social good".
Language that focused on the negative connotations was only favoured by 23 per cent who preferred the term "does not invest in companies that do not meet standards for doing environmental and social good".
Mr DeMoss said: "Responsible and ethical investing is clearly a priority for many employees, so it is becoming increasingly important for pension schemes to consider the exact language they are using when communicating with their scheme members about the funds they are invested in."
From October 2019 pension schemes – both defined benefit and defined contribution - with more than 100 members will be forced to disclose the risks of their investments, including the ones arising from ESG considerations.
Last week (June 4), Guy Opperman, minister for pensions and financial inclusion, praised these regulations saying that the policies have been a "game changer and focused minds".
He said: "The financial risks from climate change are too important to ignore.
"Many pension schemes are doing the right thing by tilting portfolios towards renewables or away from fossil fuels, and by engaging much more forcefully with investment firms who fail to take environmental and social issues seriously."
On May 30, the Association of Member Nominated Trustees issued a formal complaint to the Financial Conduct Authority over the failure of asset managers to allow pension scheme trustees to choose which companies they invest in.
amy.austin@ft.com
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