Flick on the light: make ESG pension action a ‘no brainer’

You’ve finished dinner and scrape the bits of leftover takeaway into the food bin, casually chucking the plastics into the recycling. You’ve left the kitchen and flick off the lights. When you brush your teeth this evening, do you notice you turn off the water as you brush?

These seemingly insignificant actions, repeated time after time with hardly a passing thought, are small enough for your mind not to register. Like taking a step backward when you hear ‘mind the gap’ waiting for the tube.

We don’t think about turning off the lights as we leave the room. We just do it.

Over time, in hundreds of households across the nation, these micro-actions make a significant ecological difference. An action so small, so ingrained in our subconscious that it becomes a habit ^{[1]Footnote 1}. And a habitual action compounded over time, is powerful.

Mind the (action) gap

According to sustainable pension campaigners, Make My Money Matter, “there’s about £2.7 trillion invested in UK pensions” ^{[2]Footnote 2}.

Imagine the power of micro-actions with nearly £3 trillion behind it ^{[3]Footnote 3}. Imagine employees across the country using their workplace pension power to such effect that it becomes a micro-action – like switching off the lights. One that can make a significant impact on environmental, social and corporate governance decisions. “Sustainable funds,” states the Make My Money Matter campaign, “can be 21 times as effective at reducing your carbon footprint than eating less meat, using public transport, reducing water use and flying less combined ^{[4]Footnote 4}.”

And since that’s an attractive legacy of sustainability to have as a business, there are some steps to take before the behaviours around workplace pensions, particularly ESG ones, become second nature – a no brainer (in a good way).

Mind the (knowledge) gap

When you close the fridge, rather than dawdling with the door gaping, you do it without chatting through the reasons in your mind. Keeping the door open is a waste of energy. There’s no gap between knowing this and acting on it because it’s well established in your mind; it has reached micro-action status.

With pensions, the gap between knowledge and action seemingly exists for many. In an Aviva Master Trust (AMT) member survey, 60% of employees either felt ‘not at all knowledgeable’ or ‘not very knowledgeable’ about their workplace pension or pensions in general ^{[5]Footnote 5}. Our latest research, from the Working Lives Report (2022), found that over half (55%) of employees don’t know if their workplace pension fund is invested responsibly ^{[6]Footnote 6}.

This suggests an opportunity to help your employees bridge their knowledge gap. Pensions with an ESG focus can be an effective means of encouraging change, so empowering your employees with relevant information may strengthen your relationship with them while changing the environment outside your office doors.

And it seems the appetite for learning is there. Nearly nine out of ten AMT members (87%), for example, would like to get communications about their pension more throughout the year. While the survey found a strong desire for regular communication from members across the board, it seems those aged in their late 20s, early 40s, and early 70s would prefer to get communications about their pension every few months. And as nearly one third (32%) can’t remember getting communications in the past year ^{[5]Footnote 5}, this suggests an opportunity for to create memorable messaging that invite, capture and grow interest in ESG pensions.

Maiyuresh Rajah, Head of Investment Strategy and Propositions at Aviva, recognises this challenge and states, “One of the toughest pension nuts to crack is getting people to engage with their workplace pensions. Often, people don’t consider how much money they have in their pension until they get closer to retirement. Helping savers better understand whether their pension is invested responsibly could be part of the solution. If people understand how their pension is having an impact on the planet and society, it might make them want to engage more with their pension ^{[6]Footnote 6}.”

When reviewing your pension communications, our article Tune in, drop out disengagement: 5 ways to connect on ESG pensions may help you to develop a plan.

Mind the (value) gap

Recycling existed since ancient Rome, with Athens organising the first municipal dump programme in 500 BC, and it evolved in our collective conscience for centuries ^{[7]Footnote 7}. We’ve had time for our knowledge and values to catch up to our ambitions, especially through the Industrial Revolution. 

But sustainable investing, specifically ESG factors in pension funds, is a bit more novel in comparison – by roughly 2,500 years. And although awareness and actions around ESG pensions are growing, there may be a gap in values or the level of importance businesses and employees place on ESG.

Our Working Lives report found that while four out of five employers (80%) think it’s important that a workplace pension fund is invested responsibly, and 65% of employees agree, just over a third (34%) think it’s essential and just under half (46%) believe it’s important rather than essential ^{[6]Footnote 6}. And although members are positive when it comes to ESG factors in their pension, according to our AMT survey, 62% aren’t convinced or “committed” to the idea. When asked if they would prioritise ESG factors over returns, 71% of members wouldn’t ^{[5]Footnote 5}.

This suggests that both employers and employees may, currently, value return on investment more than having funds invested responsibly. Or they believe that returns and ESG may be mutually exclusive.

This isn’t to say that ESG factors aren’t important or valued. It’s that employees aren’t willing to sacrifice potential returns for a focus on ESG.

But the gap between the return on investment and ESG goals may be narrowing. “Products that successfully integrate ESG factors into the investment process,” says Maiyuresh Rajah, “are likely to provide superior investment returns over the long term. Governments all over the world are starting to legislate for greater ESG integration, including allocation of investment capital. Consumers are also increasingly taking into account whether the companies they are buying goods and services from are behaving responsibly. This is a very supportive landscape for ESG-related stocks, which are likely to benefit hugely ^{[6]Footnote 6}.” In time, you may find employees more receptive to and curious about exploring workplace pensions that support ESG targets.

Almost two-thirds (61%) of employers, for example, think there’s room for pension providers to improve their ESG investment options. For businesses and employees, according to the Working Lives report, climate change and data security were amongst the top three most important considerations for pension providers to review when deciding where to invest contributions.

Maiyuresh Rajah further notes that, “having ESG-focused self-select options that people can choose to invest in will be helpful but, considering that most people’s assets are invested in default funds, employers and providers may want to focus on default strategies that integrate ESG factors across the whole solution.”

And as we close the gap in knowledge and values, there’s one more area to think about before behaviours around ESG become second nature.

Mind the (technology) gap

Make it easier.

Pensions, and the information surrounding them, can be complex. That’s why we have pension providers, fund managers and trustees to help navigate the options. And, at least right now, moving to an ESG pension isn’t as easy as flicking on the light. For employees, the point is to help remove the barriers to action.

Demystifying workplace pensions by offering transparency around how they work, where exactly a member’s money is invested, and how ESG factors impact global decisions in real time may encourage pension action. This information exists and, alongside making it transparent or less jargon based, technology could provide some solutions.

The ability to access this information as quickly and effortlessly as scrolling through an app may help ingrain pension action into daily life. Imagine employees reviewing which businesses their pension scheme supports (and how they rate on an ESG scale), how healthy their retirement savings is or how their funds are growing as readily as they check their social media profiles.

We don’t often think about the circuitry behind the light-switch because it’s only a flick of the finger.

To explore employee and employer perspectives on workplace pensions, savings and retirement check out our Working Lives Report.