New DCIF report explains how and why it’s time for pension schemes to embrace ESG

Jul 24, 2020 | News

The DC Investment Forum today releases a comprehensive new two-part report which gives pension scheme decision-makers a clear rationale and framework for embracing environmental, social and governance (ESG) issues.

People are becoming more and more passionate about ESG issues. The first part of the report, The Key to Unlocking Member Engagement, examines how defined contribution (DC) savers have become even more concerned about ESG issues in the last two years, using directly comparable survey data from our 2018 report.

For example, 87% now believe businesses have a wider social responsibility than making a profit, up from 81% in 2018. People worry more about the state of the world and feel responsible for making a difference; 66% now feel this way, compared to 59% in 2018.

The Covid-19 pandemic has also shifted the dial. An overwhelming 82% believe the crisis will change society forever, with three quarters of members feeling that there is more of a community spirit now than before the crisis.

There is clear demand for responsible investment among DC savers, with seven out of ten saying it is of interest to them. Older people are just as interested as younger people, despite it often being reported that younger people care more about these sorts of issues. The DCIF’s 2020 survey demonstrates that people are interested in responsible investment, with no significant differences by age.

Having established that there is clear demand for responsible investment, the second part of the research gives DC scheme decision-makers a clear framework for investing responsibly. After a period where many trustees have simply aimed to comply with a series of new regulatory requirements, an increasing number of schemes are looking to improve their efforts so that these go over and above the bare minimum. The DCIF decided to commission a report which would help provide trustees the confidence and tools to approach this activity and to become good citizens for their members.

The Good Citizen’s Guide to ESG, written by Nick Spencer, is a step-by-step guide to having thoughtful & structured conversations about ESG. It contains helpful tips on how to have a fruitful dialogue as a trustee board, designing a strategy, reviewing your existing portfolio, engaging with investment managers, and measuring your progress.

The report concludes with The 150 MY PORTFOLIO Plain English ESG Questionnaire, a set of questions with a recommended 150-word limit, which schemes can ask their investment managers to complete. We know the asset managers who work together in the DCIF are keen to engage. We hope this will become an industry standard, and help schemes to differentiate the managers which have thoroughly engaged with ESG issues themselves.

Hilary Inglis, chair of the DCIF, said: “This research demonstrates that once people understand the implications of ESG, they are keen that their pension savings are invested in this way. At present, there is still a disconnect between the great work being done across the industry and people’s understanding and awareness of ESG issues. We hope this report will help to bridge the gap. As a group of investment managers, we look forward to engaging with pension schemes on these issues, answering their questions and helping them to better reflect their members’ principles and priorities.”

Janette Weir, co-founder of Ignition House, said: “In 2018, we surveyed members on ESG for the first time and questioned whether it could be the key to unlocking member engagement. While members still don’t always make the link between their pension savings and the wider world, they now care even more about ESG than they did two years ago. It seems inevitable that we will reach a tipping point where they make the connection and their feelings spill over into action. We hope this report will provide pension schemes with the evidence they need to act now to become more responsible investors.”

Nick Spencer, founder of Gordian Advice, said: “Time-pressed pension schemes can get overwhelmed by the day to day matters and immediate priorities, but this research reinforces how important it is that they find time to debate ESG issues thoughtfully. Putting it simply, responsible investment is financially material, a regulatory requirement and something members have increasingly strong views upon. Good trustees are not satisfied by scraping by on the bare minimum and are seeking ways that they can become better stewards of the trust bestowed with them. I hope this report will give trustees a practical toolkit to use in their own conversations as boards and to challenge their advisers and investment managers.”

The asset managers that make up the DCIF are committed to promoting investment best practice within DC pension schemes.