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Financial wellbeing. Is ESG the key?

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ESG. Financial wellbeing. That is the SEO sorted for this article. But other than a brazen attempt to woo the almighty Google algorithm, why am I discussing these two things together?
I will leave discussions around the merits of ESG investing to others (I will say this is not Ethical Investing 2.0, but perhaps it is not as seismic a shift as sometimes painted) but it seems inevitable that ESG is going to play a bigger and bigger part in how companies are viewed over time.

There are a few things going on here. Government ministers are urging pension companies and funds to ‘do the right thing’ by using the £trillions invested for the long term to also tackle climate change and the wider issue of a sustainable future. This makes perfect sense: pensions are a very long-term investment and I am sure the members, whose money this is, want to retire in a sustainable world.

But pensions don’t always – rarely, in fact– invest directly in companies and assets. Instead they buy pooled funds managed by investment managers. Thus pension funds are dependent on the investment managers to influence how companies can behave more sustainably, either by holding the companies to account or by creating funds which favour those companies who demonstrate positive characteristics.

But the Association of Member-Nominated Trustees (AMNT) says that these same investment managers are often unclear on if, never mind how, they intend to use the power they wield when it comes to ESG issues such as climate change, gender and ethnic diversity and excessive pay. So maybe the AMNT is right to call for more FCA intervention, to ensure that progress is not glacial (excuse the pun).

And it is that progress that I am interested in. It is here I should apologise in advance, for the fact that this blog is more about questions than answers. But I think they are interesting questions.

Where do we think the direction of ESG will take us? How much of an impact will companies’ internal behaviours have on their external valuations? Will companies be able to implement policies and behaviours in a cost-conscious way within a competitive market? The long-term nature of pension investment means that investment managers – and by proxy the pension funds and members they represent – should be interested in the longevity of a company, the corporate governance it undertakes and how likely it is to thrive in the years and decades to come.

Will a company that forces employees into unhealthy working practices be seen as a more risky investment? Will the pressure to improve the health and wellbeing of workers only come from HR departments, people’s champions, unions? Or will investors start pressuring employers to do the right thing by their employees?

Life is seemingly becoming more and more challenging for more and more people. Much of that starts with financial problems, with a number of issues identified in the excellent and wonderfully bold Listening Document recently published by the newly formed Money and Pension Service. Will ESG inevitably lead to closer inspection of how companies are supporting their employees in their financial wellbeing?

I don’t know the answer to that, but it doesn’t seem completely improbable.

And I would also ask – if pension funds are asking their fund managers to look into more and more areas of ESG and ESG-related issues, doesn’t that mean that companies will have to as well, in order to attract ongoing investment from the markets?

We think there are incredibly important reasons to have a positive social contract between employers and employees, not least to create a workforce that can take on tomorrow. Seems we may not be the only people looking at that in the future.

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