Regulatory pressure on pension schemes to consider environmental, social and governance factors is building, so trustees, consultants and fund managers must work together to give members access to the best products, argues Redington's Lydia Fearn.
ESG is a minefield for trustees and governance committees. It has no clear definition, and different people and organisations take it to mean different things – so it can be tricky to know where to start.
As a first step it is important for those who look after the scheme investments to work from the same definition and understanding of what ESG means to them.
We should be thinking about what is going to deliver the best outcomes for members
A recent survey of investors by Wells Fargo showed that 34 per cent of respondents said a defined contribution ESG option would make members “feel more favourable towards their employer”. ESG could be a good way to boost engagement with members.
However, it is more important for trustees and governance committees to consider ESG as a risk factor within the investment design.
If a member does then ask about ESG considerations, there will be a clear answer that considers the members’ investment outcome.
Regulator can boost ESG considerations
The Pensions Regulator continues to play a key role in promoting consideration of ESG factors.
We are already seeing it sharpening its teeth in this area – particularly around environmental factors such as climate change – and expect to see significantly stricter requirements around how ESG goals are assessed in the next few years.
While we may never see it become mandatory that ESG is incorporated into DC default funds, we do believe that tougher regulation will play a key role in ensuring that it cannot be ignored.
Transparency is key
The asset management community needs to listen to the industry and design and build products that are fit for purpose and priced appropriately.
But in order to increase engagement with ESG more broadly, it is also vital that funds are as transparent as possible so that trustees, governance committees and ultimately members, can fully understand what they are invested in.
With so many different approaches and ideas relating to ESG already out there, you need to know that you can choose a fund that is best suited to your membership and delivers the performance needed to achieve good outcomes.
Delivering the best outcomes
Meanwhile, consultants need to be pushing ESG onto the agenda and working with fund managers and clients to develop and build better solutions – we should be thinking about what is going to deliver the best outcomes for members.
Right now, we are waiting for the next wave of action in ESG – we know there is a lot of work going on behind the scenes but building funds takes time.
My hope is that these new funds will be accessible for all schemes, not just the largest, so no matter what scheme a member is in, they have access to the best ESG funds in the market.
Lydia Fearn is head of defined contribution and financial wellbeing at investment consultancy Redington
