Environmental, Social and Governance (‘ESG’) in pensions - how can we make a difference?

The current challenge

ESG legislation is becoming more ambitious. Industry commentators are crying out for the pensions industry to do more to support societal issues, and our stakeholders are rallying behind them. The industry knows that it needs to do more.

The sustainable investment market is larger than ever. ESG factors are making their way towards the top of pension investors’ priority lists for a variety of reasons, including protecting savings from climate risks, and to capitalise on the financial benefits of early adoption. 

And with high profile schemes moving billions of pounds into ESG funds, there is clear demand for more sustainable investments. What is less clear is the true impact these changes may have.

What are the risks?

Many companies have released eco-friendly fund ranges or have tried to make business practices more sustainable. This is great for spreading awareness, but it’s hard to judge when a company is genuine. ‘Greenwashing’, the promotion of vague or false claims about environmental credentials, poses a real danger for compliance with climate legislation.

So what can we do about it?

In June 2020, the European Council and the European Parliament attempted to address this with a taxonomy regulation1 to establish a classification system to identify the degree economic activities can be considered to be environmentally sustainable. Under this framework, an investment product is considered sustainable if it makes a significant contribution to one of six environmental objectives whilst doing no major harm to the others. It includes areas such as greenhouse gas emissions, pollution prevention and biodiversity protection. 

However, adoption has been slow. PwC recently carried out some market research2 on more than 200 ESG related funds across the EU and found the majority of products offered only a vague description of their ESG characteristics. This highlights the progress still to be made.

Not forgetting the ‘S’ and ‘G’ in ESG

With the significant public interest in COP26, we’re seeing a greater focus on climate issues, and it can be easy to forget that ESG is about more than the Environment. There is a long list of issues that could fall under the heading of ‘ESG’, including preventing modern slavery, but some of these can be hard to track. Investments in exploitative companies will end up being poor choices and reflect badly on the investors, but it’s not always clear which companies are exploitative, or what data needs to be captured to monitor this.

On the other hand, some ‘Social’ and ‘Governance’ factors are easier to measure, thanks to increasing reporting requirements. For example, the female and ethnic minority representation in a company’s boardroom and wider workforce can generally be easily monitored now given diversity reporting regulations. This is just one example where legislation is helping investors to make sustainable investment choices. 

Making a difference

Legislation is making it easier for pension investors to take positive action in support of ESG. There are simple things we can all do, such as promoting the use of the EU taxonomy and monitoring board diversity when investing pension assets. As these steps get more accessible there is bound to be less understanding if they are not taken, risking reputational damage as well as posing a threat to the long term sustainability of your investments. The weight of legislation and public opinion around ESG can only grow. As it does, the pensions industry has an opportunity to show how we can lead the way.

1. The Sustainable finance taxonomy (Regulation (EU) 2020/852)
2. https://www.pwc.ch/en/insights/fs/greening-your-financial-products.html

The article above was published in European Pensions magazine - https://www.europeanpensions.net/digital_editions/EP-Spring2022-digital-edition.pdf

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Emma Morton

Emma Morton

Pensions Partner, PwC United Kingdom

Tel: +44 (0)7901 387909