12 February 2020
New research highlights mismatch between default funds and significant public desire for reassurance that their pension is invested responsibly.
Pension providers must focus on making their default funds more ESG-friendly if they are to satisfy investors’ preferences, indicates new research from pensions advisors LCP and research analysts YouGov.
Companies’ approach to the environment, fair trade and employee wellbeing rank highly among Britons, with large majorities viewing those factors as either very important or fairly important when it comes to where their pension is invested. More specifically, 79% of survey respondents said it is important that their pension savings are invested in companies that care about employee wellbeing and nearly three quarters (73%) would want to invest in companies that care about the environment. 69% identified a company’s approach to fair trade as important to them. People also want investment managers to encourage good corporate practices in these areas.
Most savers are invested in the default option, so it is here that providers should focus their attention. Investment managers are taking ESG into account, with 88% now signatories to the international Principles for Responsible Investment (PRI) charter, according to LCP's Responsible Investment Survey 2020, but there is still considerable scope for improvement. Many are not going as far as the LCP/YouGov polling shows that people would like.
Although acknowledgement is growing that responsible investing can often deliver better financial results, nearly half of Brits said that, if it came down to it, they would even be willing to sacrifice returns as a result of applying such principles. Significant proportions would be willing to accept a slightly lower return on their pension investments to invest in companies that care about employee wellbeing (47%), environment (46%) and fair trade (39%).
Other notable highlights from the survey include:
· Asked to imagine investing £1,000 of their own pension, around just under half (46%) of respondents replied that they would consider a company’s approach to employee pay and conditions, 41% would review its approach to climate change and sustainability, while 39% would prioritise the organisation’s approach to human rights. Only 26% would consider executive pay and even fewer (14%) would consider the diversity of the people leading the company.
· When asked about encouraging good corporate practices, 81% of survey respondents said it is important that their pension provider does this for employee wellbeing, 77% for the environment and 74% for fair trade.
· 18-24 year-olds appear to be the most willing to accept a slightly lower return to invest in companies with strong social and environmental practices and 45-54 year olds the least willing.
Claire Jones, LCP Principal and Head of Responsible Investment, commented:
“Public sentiment has shifted in the last two years in relation to environmental, social and governance (ESG) issues, and many considerations that were previously seen as fringe concerns are now mainstream discussion topics. The momentum behind the ‘war on plastic’, debates over diversity in the workplace, and climate change shows just how much these have come to the fore. These stats highlight this increased public awareness of these issues in the context of pension investments.
“Pension providers can no longer assume that it’s enough to offer savers an ethical investment option. They should be taking into account the environmental and social practices of companies, as well as the products they make, in the default funds used by most savers. There must also be greater clarity in communicating to members how their default fund is invested. This will address societal trends and savers’ moral priorities.
“There is growing appreciation and acknowledgement that incorporating ESG factors when investing can deliver better financial performance. The research shows that many people are even willing to sacrifice some return. Understandably, the legal framework doesn’t permit providers to give up returns in the default fund, but they can and should go further in embracing ESG investing.”
“Although ESG issues are now firmly on the investment agenda and in public mindsets, significant gaps remain between savers’ preferences and reality. The industry must still do more to close this gap and reassure savers that their funds are invested responsibly.”
The survey results, based on a representative sample of 2,162 British adults, are the latest in a series of insights released as part of the Future Pensioner campaign from LCP. The campaign seeks to shine a light on the state of pensions and retirement savings in the UK, and raise awareness of and debate around key elements of ensuring the pensioners of tomorrow make better decisions today.