ESG investing has been in the spotlight, particularly over the past year, and seems to be the topic everyone is talking about. But before we can engage members on the pivotal role their pension can play when it comes to influencing ESG improvements, we need to go back to basics. Pension awareness is needed. Many members are simply not aware of how their money is invested, and the impact this can have on issues that are important to them.
ESG shouldn't just be an acronym that's thrown about, it needs to be explained. It stands for Environmental, Social, and Corporate Governance, and is an umbrella term for responsible and sustainable investing. Many members are already enthused and care deeply about ESG issues. Quite often the challenge is highlighting the connection between ESG and their pension. Once this awareness is established, then it can prompt engagement.
Cop 26, Insulate Britain, and wider climate protests have dominated headlines over the past few months and all will have an influence on member engagement with environmental issues. But environmental issues are only part of the ESG puzzle. The issues that resonate with members will vary. While environmental issues such as climate change may strike a chord with some, others may be more interested in social and governance issues such as a diverse board of directors and fair pay. There isn't a one-size-fits-all. Members views will vary, understanding these differences and what is important to them matters.
Results from the Aviva Master Trust member survey [1]found the top three ESG considerations for members are:
- How a company is managed: its pay structure, working conditions, and relations with the wider community.
- Climate change: the company's commitment to carbon reduction and progress towards net-zero emissions.
- Waste reduction and recycling: balancing a company's inputs, outputs, and by-products.
ESG has the potential to enhance member engagement. An awareness that investing in sustainable funds can be more effective at reducing their carbon footprint than eating less meat, using public transport, reducing water use, and flying less combined [2] might be the catalyst for people to engage with their pension, perhaps for the first time.
Building trust in sustainable investing
ESG is vitally important for both business and society, but also to delivering sustainable long term returns on our investments. Regulation, changes in the way businesses are run and commitments from government and corporates are all going to help combat issues such as climate change. Pension providers and asset managers will play an important role by encouraging corporate behaviours that help secure a long-term future for society, as well as for shareholders. This can be through selective investment and disinvestment but also through exercising voting rights .
The Aviva Master Trust's Board of Trustees have formulated their own set of ESG investment beliefs, which reflect their conviction that by including ESG factors into investment decision making, it will reduce the overall investment risk to which their members are exposed, while generating sustainable returns.
To grow investments over time, all financial risks associated with ESG need to be taken into consideration, but ESG can be a good source of investment growth opportunities too. When assessing governance, those companies with good risk frameworks in place are likely to be better run and therefore, will have a greater chance of succeeding over the long term.
71% of members who took part in the Aviva Master Trust survey [1] said they were ‘pro-ESG' if returns were the same or higher. This suggests members need reassurance that there is no sacrifice for investing sustainably. Whilst the value of any investment can go down as well as up, with the risk that members may get back less than has been paid in, ESG-friendly portfolios do not compromise on the value of pension investments, if anything they enhance them. This supports the Trustees' decision to focus on financial rather than non-financial factors.
Non-financial factors might be more important to the 29% of members who would risk lower pension returns for ESG investments, though. These intentions demonstrate how meaningful ESG issues are to members and how they might extend into investing even more ethically, perhaps accepting there may be lower returns as a result. [1]
There is a difference between good intentions and taking action, however. ESG investment is currently being led through the management of default funds, but there's a clear appetite amongst some savers to make a bigger impact. Consistent member communications and engagement are crucial to empower savers to make their own decisions.
By making members aware of the positive impact their pensions can have, we can create twin virtues of improved engagement and increased demand for ESG defaults and self-select funds. Not only helping secure financial futures, but the future of the planet as well.
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[1] Aviva Master Trust Member Survey 2021
[2] Frequently Asked Questions - Make My Money Matter
This post is funded by Aviva
