How should schemes factor in members’ ESG concerns?

Pension funds are increasingly having to consider their members’ concerns about ESG factors.

This is new ground for a lot of schemes and there should be a balance when doing so, says Jo Sharples, chief investment officer of defined contribution solutions at Aon.

She explains that when asking for member views there is a danger that only the more engaged or interested members will reply.

Pension funds need to move beyond simply operating in ‘transmit’ mode

Georgia Stewart, Tumelo

“As a result, those views may be those of a smaller minority rather than the membership as a whole,” she says.

Many members believe their employers invest ethically

There is also a financial aspect to consider as trustees have a fiduciary responsibility to members, Sharples notes.

Maria Nazarova-Doyle, head of pension investments and responsible investments at Scottish Widows, agrees, explaining that a pension provider’s primary role is to build financial security for members in retirement.

She emphasises that this is even more important given that the majority of pension savers are in default strategies, putting greater responsibility on to the pension fund.

Both Sharples and Nazarova-Doyle, however, argue that financial responsibility can go hand in hand with member concerns and ESG efforts. 

“A responsible investment strategy can create sustainable benefits in the long-term for everyone,” says Nazarova-Doyle.

In terms of timing, there are arguments in favour of addressing ESG considerations in good time.

Kirsty Moffat, head of DC engagement at Hymans Robertson, is an advocate of raising this topic from the outset in anticipation of changing expectations.

“In member surveys we have conducted, a large portion of members say that they believe their employer will invest their pension savings into ethical and ESG-friendly funds,” she says

She warns that for those pension funds where this is not the case, it can often lead to “disconnect” between members and their scheme.

Stepping stones to understanding

Raising ESG matters can involve education for members, according to one expert. 

Georgia Stewart, co-founder and chief executive of Tumelo, a technology company that facilitates member engagement on ESG issues through voting platforms, says pension funds must first ensure members understand where their money is invested and how it is managed

Moffat adds: “Previously, especially in a defined benefit pensions world, members didn’t know what they were invested in, and pensions were something you only thought about when you retired.

“Nowadays, with everything being digitalised, members are able to see the size of their pension pots at the click of a button.”

She explains that this is also driving a growth in enquiries from members about ESG, as they are increasingly seeing the introduction of ESG investment options into DC default strategies and self-select fund ranges.

But data remains an issue when educating members as the data from fund managers can often be inconsistent. 

There are other reasons for schemes to be wary, Moffat warns. “Providing more information to members can invite further scrutiny from members and ultimately more work for the scheme,” she says.

Here, Sharples suggests that if the data is not available, pension schemes can consider sharing case studies with members instead.

“These can tell a story for members and don’t necessarily require data, helping to address some of the challenges around data that we are seeing while also getting a really positive message across,” says Sharples.

A ‘two-way dialogue’

Once members understand their investments and how ESG considerations factor into them, what is central to member engagement is communication, according to Stewart.

“Pension funds need to move beyond simply operating in ‘transmit’ mode, where they send out an annual report on what they have done; they need to have an ongoing, two-way dialogue with their members,” she says. 

Stewart adds that pension schemes as a whole find it “extremely challenging” to guess how members would want them to vote on differing ESG issues.

This is made difficult by shifting views over time and due to the fact that members can vote very differently from one resolution to the next, “even on apparently very similar issues”, she says.

Members’ views could be impacted by the world around them. Nazarova-Doyle explains that socioeconomic shocks, such as the Covid-19 pandemic and the ongoing war in Ukraine, can change members’ mindsets and values. This makes continual dialogue crucial.

Occasional online surveys and annual member forums have taken over from the previous member-nominated trustee, and even now are in the process of being replaced by even more interactive technology.

For instance, Nazarova-Doyle explains that Scottish Widows launched a tool within its app called ‘Find your impact’, through which it can ask members questions regarding their fund range, as well as stewardship priorities and engagement activities with portfolio companies.

Sharples says that often it is easier to consider members’ views on broader ESG issues, such as climate change, rather than on specific issues such as whether to invest in a certain company.

“Once you’ve decided which views/concerns to allow for, it’s then a case of deciding where to incorporate these in the investment strategy,” Sharples adds.

“For more specific views, this can be done more easily through the self-select fund range.”