Earlier this year, NEST sponsored Defaqto’s 2018 report ‘How to analyse workplace pension default funds’, which compares different default funds across workplace pensions.
According to the report, the current focus on investing responsibly is becoming increasingly relevant when considering how workplace pensions are invested.
Although they’re two very different approaches, investing responsibly is frequently confused with socially responsible investing.
Socially responsible investing
Socially responsible investing involves acting in a way that targets a particular investment strategy or philosophy, which complements the investor’s values. This is usually done via a collective fund that’s been designed to meet certain value-led objectives.
At NEST, we offer a range of investment funds. This includes an ethical fund that has been designed to exclude investment in companies that may harm society, such as tobacco or weapons companies.
Similarly, an ethical or social impact fund might mainly invest in companies that aim to improve society, such as community investment funds, social housing projects or educational organisations.
By contrast, investing responsibly is where the emphasis is on being more proactive in the performance of the capital. This includes managing the full range of risks and opportunities affecting the capital invested, such as financial and extra-financial risks.
Investing responsibly is about maximising the performance of the funds by engaging with companies to try to improve performance and long-term sustainability. This differs from the more usual approach, where investment managers buy and hold shares with little if any contact with the businesses in which the shares are invested.
At NEST, we follow a responsible investment policy that requires us to take account of a full range of environmental social and governance (ESG) risks and opportunities. According to the Defaqto report, well run businesses with sound ESG practices are more likely to have long-term success and overall profitability.
Trustees can use their position to influence the businesses they’ve invested in and increase shareholder returns over the medium and long-term by helping to ensure businesses are well run.
At NEST, we believe managing ESG risks as an integral part of our members’ portfolios will lead to better long-term risk adjusted returns for members. We think it also has the added benefit of improving the society and environment our members live and work in.