What the responsible investing approach means for different businesses

Should an adviser employ different tactics when trying to communicate with a smaller business versus a larger one and its employees? And can investing in ‘greener’ pensions help a business to meet its sustainability targets?

Ryan Medlock, Royal London’s senior investment development manager, believes that, theoretically, smaller businesses should be easier to engage with as there may be time for the adviser to address the majority of individuals in the scheme.

He says: “For larger businesses, you would need their support for this, for example by sending out questionnaires to staff and gathering responses. 

“Either way it’s a difficult role for advisers as it is further information gathering and more time spent advising a single scheme.”

Brian Henderson, partner and head of sustainable investment at Mercer, says that during Mercer’s review of pension schemes as part of the organisation’s Responsible Investment Total Evaluation, it identified “cohorts of smaller schemes that are not embracing ESG in the same way as their larger brethren”.

He says: “This can be down to a number of reasons, from cost through to governance. However, the individual member should not be disadvantaged through the governance of the scheme and in some cases the scheme should maybe be folded into a master trust to get a better experience.”

A question of alignment

Dan Smith, head of workplace investing distribution at Fidelity International, says the answer to this question is relatively straightforward. 

He adds: “Employers should work with their advisers to partner with a provider who has a default strategy and fund options that align with their corporate values.”

For Medlock, some businesses – particularly larger businesses – may see a ‘greener’ pension as a way to meet sustainability targets. However, he says that does not mean it is the right thing for the employees.

He explains: “We have to be cognisant of the business driving its own agenda and senior leaders or directors using the pension scheme as a ‘quick win’ on sustainability and net zero targets.”

Employers should work with their advisers to partner with a provider who has a default strategy and fund options that align with their corporate values.Dan Smith, Fidelity International

Henderson seems to agree, as he says companies look strange when the pension scheme investment choice is not aligned with the policy on climate.

“It might not help a business become ‘greener’, but it does look odd if the company pension scheme that the chief executive officer invests in is doing something different to the company’s policy on climate.”

Default preferences

Another important consideration for advisers is how they can help employers decide which funds to choose for their workplace pension scheme.

Medlock says advisers should be taking a key role in advising which funds are correct for a particular scheme, not just in terms of attitude to risk but in other areas. In this bracket he includes attitude to ESG and its importance to scheme members, which could vary depending on the individual.

He also includes engagement strategies versus divestment and key areas they would like providers to engage on, as well as the investment style of the members themselves.

“Also [important is] considering more than just attitude to risk in a conventional sense – what are their feelings towards short-term volatility versus long-term returns?”

Furthermore, it can be hard to generalise the preferences of employees of a single employer, which means “finding a suitable default can be challenging”.

Henderson says the difficulty when considering what challenges employers are facing, and how advisers can help find the right funds, is that most companies will not have considered non-financial objectives when setting up the contract with their provider.

He says: “Indeed, many of these might be very old and predate the recent governance around ESG and climate.

“We [Mercer] have a very good survey to help draw out what’s important to companies or trustees when viewed through an ESG lens. This helps set the tone in terms of implementing the right funds, whether it’s climate-related, social impact or even biodiversity [related].

Shaping the future

It seems with so many variables at play in the workplace pension and ESG debate, there is much to be said for providers’ efforts in ramping up their ESG offerings in a committed way to employers and therefore keeping scheme members happy.

Advisers have a key role in this debate and can help to shape the choices that people make as the growing interest in ESG becomes an integral part of the workplace pension arena.

However, the use of the term ESG as purely a marketing activity or tick-box exercise is something that everyone who is committed to the goal of net zero carbon emissions will need to avoid.

Strategies must be solid to prevent passing the issue – including carbon dioxide emissions – on to another area of the industry or out of the industry altogether.

One certainty is that the ever-present regulations will ensure that pension investments should become more environmentally and socially responsible.

The governance area is demonstrating that many parts of the workplace pensions industry are working together to strive for change.

It is hopeful that the providers, employers and advisers can work together to enact enough change in time to make the global impact of ESG issues in the large amount of workplace pensions positively certain.

Ruth Gillbe is a freelance journalist