How understanding a provider’s responsible investing strategy helps employers

Understanding a provider’s responsible investing strategy is key for employers to be able to offer suitable investments to their members, as well as to boost engagement. 

For Ryan Medlock, senior investment development manager at Royal London, a number of strategies would make it easier for employers to invest more responsibly in their pension plans.

He says clearer signposting so that employers can understand which investment options do what and consequently how they perform would help, adding that the Financial Conduct Authority is expected to publish a consultation shortly on sustainability labels.

Medlock says that the Taskforce on Climate-related Financial Disclosures, which became mandatory last year, and is aimed at improving as well as increasing reporting of climate-related financial information, would also make a difference.

Make it clear

Another issue that is evident is the clear definition of what constitutes ESG in any given context, as it can seem quite broad and is ever-changing. Regulation and discussions around ESG terminology are discussed in this guide.

Medlock adds that providers taking more responsibility for design and suitability of defaults would be useful too. “Without this, employers or their advisers have an increased burden in selecting options other than a provider’s default.”

In this area, Medlock says an increase in stewardship activities, alongside a playback on the outcomes of such engagements to understand their potential power, can act as a “force for good”.

For Dan Smith, head of workplace investing distribution at Fidelity International, providers need to deliver transparency on what assets are held within particular funds and what the ESG score is for each fund.

Smith says: “For instance, this can be found on our fund factsheets in PlanViewer – our online portal which allows members to view and manage their pension. 

“FinTech tools such as Tumelo – where members can submit their opinions on ESG topics relevant to the funds they are invested in – can also provide this level of transparency.” 

Brian Henderson, partner and head of sustainable investment at Mercer, says the obvious way to invest responsibly is to integrate more sustainable investment with the default arrangement.

He adds that providers can make it easier for employers to invest responsibly by “expanding the self-select range to either have a dedicated ESG section, or if there is a stronger view, they might ensure all their self-select funds have ESG or climate considerations fully integrated”. 

“The challenge here is ensuring that the employer has undergone some form of belief-based study to articulate their ESG and climate objectives in order to pass them onto the provider.”

Henderson is, however, sceptical as to whether employers do carry out such belief-based studies. He says: “I suspect this is rarely done in practice.”

With the growing knowledge and understanding of ESG principles in financial markets, it seems as though this might be a pertinent way to engage customers.

Understanding provider philosophy

Maria Nazarova-Doyle, head of pension investments and responsible investments at Scottish Widows, says understanding the philosophy and investing approach of any potential provider is a key part of the selection process in the context of making recommendations to employers.

She says: “Part of this assessment of a pension provider is whether their approach should lead to good outcomes for customers. Investment philosophy, strategy and proposition should all be in alignment to have the greatest likelihood of delivering good customer outcomes.”

A fundamental tenet of this approach is for investment managers to take all variables into account, Nazarova-Doyle believes.

“By investing responsibly, all material factors are taken into account in the long-term analysis of investments by managers, and into the development of the customer investment proposition by the pension provider,” she says.

Nazarova-Doyle explains that responsible investing incorporates “a more complete set, and thus holistic view, of relevant risks and opportunities into the assessment of investments and product propositions. Pension schemes are long-term vehicles, so selecting a provider with a long-term investment outlook is key to ensuring good customer outcomes”.

Employers should want to know that the issues their provider is championing are aligned to those of their employees.Ryan Medlock, Royal London

Medlock of Royal London says most providers will have a similar strategy when it comes to engagement, explaining that “what is important is their effectiveness at driving change”.

He says: “This can be done directly, or in conjunction with industry bodies. However, no provider will have the capacity to engage with every company they invest in on every issue.”

He still believes it is important to understand a provider’s responsible investing strategy though.

“Providers will often select themes that are important to them and their customers and focus their engagement efforts around these themes. Employers should want to know that the issues their provider is championing are aligned to those of their employees.” 

Responding to the question of why understanding a provider’s responsible investing strategy is key for making recommendations to employers, Henderson says: “This is difficult to answer properly.”

“We fully understand the construction of individual funds and their associated strategies from an ESG perspective; we also have some insight on the people that manage the money. 

“However, a separate question is, does the provider as an organisation or company have ESG and/or climate policies in place? Do these lead to clear processes that staff follow? Can they provide evidence it is actually happening?”

He also raised the point of whether their board is representative of their workforce and what the gender pay gap is at these providers, suggesting the actual reality of what is happening in an organisation can differ from what appears on paper and in meetings.

Ruth Gillbe is a freelance journalist