Over the past couple of years, the number of pension schemes mentioning environmental, social and governance (ESG) factors, when talking about their investment strategies, has rocketed. It’s arguably been the biggest topic for the industry – there doesn’t seem to be a pensions conference these days which doesn’t devote at least a section to it.
As regulation on ESG and stewardship beds down in the UK, pension schemes have to now think about turning this chatter on ESG into strategies, implementation and tangible outcomes for members.
This action is needed because some pension funds are not currently incorporating risks and opportunities which are financially material and potentially fundamental to their members’ retirement outcomes.
Climate change, for example, is a financially material risk and something that needs to be factored into investment strategies. With Nest’s particularly young membership and the fact many will be saving with us for more than 40 years, for some even 50 years, this is a theme we’re addressing in order to help mitigate risk and secure good long-term returns for our members.
If we know that responsible investing helps our members achieve a larger pension pot and have a smoother savings life, we shouldn’t hesitate in implementing strategies that treat ESG as we would do any other core risk factors.
Another ESG theme we’ve been looking at is the social impacts of tobacco and how the industry is being financially penalised because of its ESG risky business model. Our research led us to our recent decision to go tobacco-free.
We’ve come to view that tobacco is becoming an increasingly unsustainable industry as governments around the world are trying to regulate it out of existence. Stricter tobacco control measures and legal challenges from governments mean they will find it more and more difficult to market and sell tobacco like they have done in the past.
Some of the greatest challenges to tobacco can be found right here in the UK. The government is considering plans to not only reduce but eliminate smoking from Britain by 2030. With such a driving force against smoking in the UK, how can tobacco companies operating here expect to survive? Similar hard-line approaches are being used by other Governments globally and stricter rules are becoming more apparent even in emerging markets which tobacco companies now see as their core market.
While it’s first-and-foremost in their best financial interest, investing responsibly is also something our members want us to do.
When we asked some of our members in a survey last year, three quarters of those who responded said they wanted their pensions invested responsibly, with nearly a half saying it mattered a lot to them.
Savers are saying to us that it matters how their pension is invested. Which is great to hear, because investing responsibly really is a win-win – helping to achieve better long-term returns while building a better, more sustainable future for savers and their family.
At Nest the momentum is strong, and we have just procured new databases from both RepRisk and Sustainalytics which will make available to us high quality and timely ESG data.
This data will not only allow us to automatically monitor news so that anything affecting a company’s reputation is quickly brought to light, but it will help us spot any emerging risks and check that the ESG policies we have in place are being appropriately managed.
In time ESG should be seen as just another risk and opportunity factor routinely considered in the investment decision making process. As interesting as the issues are and as much as I love talking about them, now is the time to just start getting on with it.
You can watch here how at Nest we’re eliminating tobacco from our portfolios over the next 1 – 2 years, to improve risk adjusted returns for our members, and in the long-term generate better outcomes.