Investing for environmental, social and governance (‘ESG’) reasons through workplace pensions can create a feel-good factor. Here are four reasons why.

1 You'll be invested in companies that score better in ESG terms

To focus your pension investments companies are given ESG scores.

From assessing a company’s climate change policy, to its relations with employees and the community, an investment team will weigh up these environmental, social and governance (‘ESG’) factors to make sure they are comfortable with each investment’s impact on the real world. Here’s a list of things that might be considered.

  • Energy consumption
  • Climate change policy
  • Waste production
  • Community engagement
  • Human rights protection
  • Employee relations
  • Company governance and so how a company is run
  • Management quality
  • Board diversity

2 Fund managers can actively work to change things for the better

Responsible pension fund managers with both active and passive holdings don’t just invest and move on. They constantly assess their fund’s holdings, monitoring them to make sure they don’t fall below the standards expected. In addition, they actively engage with companies and use their voting rights as shareholders. A pension fund with a significant number of shares in a company can pressure that company to work to higher ESG standards and can even influence its strategy.

For example, in 2021 Aviva Investors, Aviva's dedicated fund manager, engaged with UK soft drinks producer Britvic to discuss the reduction of plastic in its packaging. Even though Britvic had shown it was serious about this matter, Aviva Investors believed that the business could do even more. Thanks to the engagement work with Aviva Investors, Britvic is now using more recycled rPET instead of single-use plastic. This is a positive outcome for Aviva Investors, Britvic and the environment and highlights how working together can foster positive change. Indeed, this story doesn’t end there. Aviva Investors continues to engage with Britvic.

The example of Britvic shows that companies have a lot to gain from engaging with the investment houses who own their shares. We believe that it is in a company’s interests to continue to meet a fund’s ESG standards and continues to respond to engagement from the investment team. If a company falls short, the fund manager might decide to withdraw their investment, bringing financial consequences for those companies who not do enough to raise their standards, whether that be on for the environment or society.

3 It reflects personal values and concerns

People frequently apply their personal values and concerns to the way they use their money. Some will donate money to issues they care about while others will make different choices when they shop, guided by ESG considerations and personal ethics. And if they’re doing that for small value purchases, why wouldn’t they want to do the same when it comes to investing money in their pensions?

4 It doesn’t have to mean sacrificing a pension fund’s investment performance

In the past investing responsibly focussed on removing so called “sin” stocks from funds, an approach that didn’t specifically consider performance or investment returns. But now, investing in ESG doesn’t only mean companies building electric cars or making beeswax wrapping.

It's also about investing in businesses that look after their customers, that work with the community, or that have a policy in place to reduce how much energy they use, and this applies across all sectors, not just one or two industries. Investors have more data available and can now analyse companies based on detailed ESG metrics as well as standard financial criteria like profitability, revenue growth and debt. This aims to help boost returns and reduce the ups and downs that their funds encounter - please remember that the value of your pension is not guaranteed and you could get back less than the amount that has been invested.

To sum up, these four reasons show why pension investing with ESG considerations can be practical and responsible way to help create a better future. The days when it was a niche proposition for a select few are long gone. Now it’s an opportunity for people like you to make a real difference in the world.