New investment trends emerge constantly, and for trustees it can be difficult to process them all, making it challenging to select those that are right for their pension schemes and members.
A recent idea that has emerged over the past couple of decades, but has really gained prominence in the last few years, has been Responsible Investing (‘RI’) or, more specifically, Environmental, Social and Governance (‘ESG’) driven investment. Put simply, this is investing with an awareness of the wider risks associated with the impact of their investments on society as a whole.
ESG can be defined within the headings:
Trustees are responsible for investing pension scheme assets for the benefit of their members. So what relevance do ESG factors have for members of a pension scheme?
The relevance can come from two sides. The first is perhaps the more obvious of the two: the members’ desire for the assets held on their behalf to be invested in a responsible and sustainable manner. For some, it might be a core attribute of their beliefs, but for others it might not be something they consider until it is brought to their attention.
In recent years there has been growing scrutiny of the investments held by institutional investors, with details reported in the media more frequently.
The media reporting of a company for any environmental, social or governance related transgression, may not only cause embarrassment for the organisation, but also could impact its perceived legitimacy. For a pension scheme it can draw the ire of members who may place further scrutiny on how their retirement provision is invested and in turn, whether the trustees of the scheme are carrying out their stewardship duties appropriately.
The other side of relevance is perhaps less obvious. Members generally have a desire for their pension to provide a stable and sufficient income stream throughout their retirement. For that to happen pension schemes need to invest in assets that are going to generate an acceptable return.
A view that has been staunchly held in the investment industry was that there was a trade-off between ESG investing and investment returns. At first glance this would seem to make sense as implementing ESG friendly business practices could be seen to come at a cost - whether due to extra safeguards, environmentally friendly materials or increased governance. Extra upfront costs inevitably would in theory lead to a lower return for investors.
However, over the past decade many studies have shown that the opposite is true. Businesses that improve standards across ESG principles tend to reduce broad business risk, which can lead to a better long term return overall. Across a wide range of studies, a majority have shown that the financial losses associated with these risks outweigh the costs to mitigate them, i.e. ESG factors drive returns rather than constrain them.
When it comes to ESG investing, KPMG Investment Advisory believe integrating ESG into your investment decision making is not a fad but is the future and is for the benefit of your members due to the potential for decreased risk and improved long term returns.