A mix of factors have shone the spotlight on responsible investing in workplace pensions in recent years. These include the Covid-19 pandemic, the need for people to be financially secure in retirement, and customers wanting to know where their retirement savings are invested, as well as governments introducing regulations to help countries move to a 'greener' future. We'll look at each of these factors in more detail below.
Covid-19 helped put the spotlight on responsible investment
As a health crisis, the Covid-19 pandemic shone a spotlight on how firms behave – not only in societal terms and so how they treat their customers and staff, but also their impact on the environment. Covid-19 also raised serious questions about firms' supply chains, their approach to diversity and their policies on issues such as plastic pollution and climate. The result has been a growing interest in where people's retirement savings are invested.
Automatic enrolment creates millions of shareholders
Workplace pensions have the potential to be real drivers of change in the ESG space for many reasons. The most obvious is automatic enrolment and the fact that millions of working age people in the UK are now shareholders in the companies that their employers’ pension schemes invest in, primarily through default funds. Another reason is the length of time people pay into their pensions – up to 40 years in some cases – and that’s plenty of time for change, not only at a company level, but more importantly at an industry level as we move to a carbon-free world.
Default pension funds
Default funds can be the engine room of ESG
People that don’t choose their own pension investment funds are probably in a default pension solution, in which the decisions about where pension savings are invested are made on their behalf. With billions invested in these funds through auto-enrolment, many pension providers have incorporated ESG into their default funds or created a new ESG default.
Regulatory power focuses more attention on ESG
Regulatory power has helped put climate-related issues into company boardrooms across the globe. We can't list every instance here however the Financial Stability Board, which established the Task Force on Climate-Related Financial Disclosures (TCFD) would be a example of how non-government global bodies are helping to lay the foundations for the transition to a greener future, and one which is supported by the global financial system. The TCFD developed recommendations for more effective climate-related disclosures from companies that will allow them to better understand the financial implications associated with climate change and empower companies to move to more sustainable solutions, opportunities, and business models.
Workplace pension scheme members
Strength in numbers
Many workplace pension scheme members are interested in what investing responsibly means and some can be passionate about the issue. Although people with workplace pensions do not represent a lobby group or campaigning organisation, the financial muscle of private pensions, of which workplace pensions form a significant part, is immense. The most recent estimate by the Office for National Statistics put the figure at £6.1 trillion, 42% of Great Britain’s total wealth.Footnote 1
The adage ‘strength in numbers’ applies here; greater numbers of people have the potential to take an active interest in what is happening in the world around them, and demand change. Pension providers, asset managers and the corporate sector are all ready to listen, and many key players are already taking action as you read this.
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