Can ESG credentials improve member engagement?

The likes of Greta Thunberg and Extinction Rebellion have led to the young in particular being more engaged with environmental, social and governance issues such as climate change in their day-to-day lives. 

In Franklin Templeton’s report, ‘The Power of emotions: Responsible investment as a motivator for Generation DC’, 45 per cent of millennials aged between 22 and 38 said they would increase their contributions if responsible investment were incorporated into their pension fund, while 50 per cent said it should be in the default strategy.

This is important, given current contribution levels are unlikely to be high enough to reach the target of two-thirds of income in retirement.

Don’t use the acronym ESG. Start with what it actually means, such as using investment to make sure that more care homes get built

Hannah Lewis, Behave London

A separate survey by Scottish Widows found 50 per cent of people were unaware their pension can be made environmentally friendly, while more than two-thirds did not know how sustainable their pension is.

Caroline Escott, independent director on Standard Life Master Trust’s trustee board, says: “One of the most powerful things about responsible investment is that when it’s done well — in a way that makes sense for your scheme and its membership — it cannot only improve your risk-adjusted returns but, if you can also tell a compelling story around what it’s doing, it can be used to encourage people to think about engaging with their savings.” 

Ms Escott says that talking to members about what the scheme is doing to be an active owner of their assets “can help make their savings feel much more real to them”.

Making a difference today

One reason why younger members do not engage with pensions is that retirement seems so far away in the future. Amanda Latham, associate and policy and strategy lead at Barnett Waddingham, says ESG helps lend savings strategy a more pressing nature.

“While the primary reason for ESG is to manage risks and seek opportunities in the transition to a low-carbon economy, it can be engaging for members because rather than a pension pot being a theoretical sum of money sometime in the future, it’s something that’s actively having an impact in the real world today,” Ms Latham says.

“Trustees can be clever about this: they can understand the themes that the public are interested in such as single-use plastics, and then explain how the pension fund is dealing with those themes.”

Schemes could use tangible examples to explain what they are doing, name the companies they have divested from, and set out the financial reason. 

Ms Latham suggests using the UN’s Sustainable Development Goals to explain to members how their pension investments are having an impact.

Research by Nest Insight found that talking about responsible investment to savers can be one of the most powerful ways to build trust in a pension scheme. That will have a positive knock-on effect on things like contribution rates, Ms Escott says.

Quite often members do not understand how their pensions work and are unaware that they are invested to make a return. 

ESG is a great opportunity to engage members on their role as an investor and the good their money does as it is invested over time, according to Kim Nash, director at PTL. 

“This enables an explanation on investing money for the longer term, and that financially this helps money to grow as well as the wider good money can do in society,” Ms Nash says.

“Breaking down the messages in terms of long-term saving and investing rather than pension should be able to make the messages more relevant to younger members.” 

Hannah Lewis, founder of Behave London, suggests talking to young members about the benefits of compounding over time and then translating that into ESG by making it about the “here and now”. 

She adds: “Speak to them about their money now, not about their money in the future. A good slogan could be: ‘make your money do good today’. Then, in terms of compounding, we could show the benefits of saving young and the societal good that does over time. 

“Additionally, show that they can pay less and get as much money than if they started later and paid more. You could then show the ‘compound good’ by using a concrete example, such as showing the money that goes into companies that save energy.”

The more members can visualise the outcome, the more likely they are to engage with it. 

“People will choose concrete outcomes that they can see and understand over ambiguous ones, even when those might be better for them,” Ms Lewis says.

“Don’t use the acronym ESG. Start with what it actually means, such as using investment to make sure that more care homes get built. Talking about it at a local level is the most effective way to engage people.”

She adds that older savers tend to focus more on conserving what they already have, whereas for younger savers, it’s all about ideas and opportunities. 

“For younger members, the focus should be more on the opportunities to do good rather than conserving investment return,” Ms Lewis says.

Power of emotions

Franklin Templeton’s research found that many millennials expressed feelings of joy and even ecstasy about responsible investment. 

Caroline Hopper, senior writer at Quietroom, says it acts as a “silver bullet” to get people to feel emotions about their pension.

“You might make people really happy or you might even upset some people, but either way you’ve suddenly got them feeling something and that’s something that has never really been done in pensions before,” Ms Hopper says. “Emotions are exactly what you need if you want people to actually engage with anything.”

It can also make them feel like they have control. “Knowing there’s someone out there working for you to influence what your investments are doing flips the switch from being completely powerless to having a say,” she adds.

This all requires extra work for defined contribution pension schemes, but trustees say they are already getting to know their members much better.

Ms Escott says: “We are receiving really interesting data on what the membership looks like, so it is becoming increasingly possible to build up a picture of what the membership thinks, how they like receiving information, and what they care about.”

Tegs Harding, director at Independent Trustee Services, would like to see ESG awareness more centralised through campaigns like Make My Money Matter, rather than at pension scheme level.

“The problem with communicating ESG, is you can’t just do it once and then forget about it and assume the job is done,” Ms Harding says.

“It has to be drip-fed, and you have to engage with it regularly on a six-month basis. Consolidation of DC schemes will help with that, because the big master trusts will have very good communication strategies and everything will be digital.”