Buck Bond Group
Why ignoring ESG in pensions investment is a business and reputational risk – and how to talk to your provider about default fund design

Why ignoring ESG in pensions investment is a business and reputational risk – and how to talk to your provider about default fund design

by Tags: ,

I’m not saying that we see the future at Buck – and she would be the first to say that past psychic abilities are no guide to future psychic abilities – but during a presentation on environmental, social, and governance (ESG) factors at a recent Buck event, my colleague and Buck Principal Celene Lee detailed the risks and possible ramifications of ‘greenwashing.’

Lo and behold, a few weeks later, this was in the headlines as we saw the Competition and Mergers Authority launch investigations into ASOS, Boohoo, and George at Asda to consider whether their “green claims are misleading customers.”  If found guilty, the CMA “won’t hesitate to take enforcement action – through the courts if necessary.”  Customers may have been misled, and companies may have profited as a result.


But what if you’re invested in those companies?

You probably are.

ASOS and Boohoo Group are traded on the London Stock Exchange, meaning your default pension fund is almost certainly invested in them. Asda is owned by Walmart, which is traded on the New York Stock Exchange – so again, your default fund likely holds Walmart shares.  And it doesn’t stop there. What else are you invested in?

Perhaps you don’t care about greenwashing. Maybe it’s not important to you as an individual.

But there’s no doubt that issues of sustainability will become more impactful for business in all sorts of ways. And related to that, your pension investments will probably come under the microscope.

You may not be involved in new business yourself, but ask your bid teams, your sales teams, or the people responding to RfPs, and they will tell you that questions about sustainability and ESG are being asked of your organisation already.


What is your sustainability policy?

Where does the money you send to your pension company get invested? When you take employee money as well, that sum is significant. Around 8% of payroll, but your company’s is likely much more. Typically, 95%+ of people are in the default fund. That’s a lot of money attached to your company.

Remember when the Church of England was complaining about payday lenders at the same time they were investing in them? The accusation of hypocrisy sticks. If your company has firm values forming part of your brand, that could be undermined by your pension investments.

Also, some of those contributions are your employees’ money. This is their pension fund after all. And here, the evidence is stacking up that ESG is not only a sensible thing for the planet, your corporate reputation, and new business, but it’s also the best thing for long-term investment performance.

Where your pension fund invests will become an issue that you need to pay attention to – for new business, reputational risk, and not least for your employees.


What can you do?

Understanding the broad impact of this is the first step. But another challenge can be getting to the bottom of your investments and their green credentials. And even if you do, it can be hard to analyse the information.

Pension providers make a big song and dance about their move to net zero and the ESG elements of their default funds. There’s no doubt that those changes are happening; but, as these changes are predicated around ESG funds, it’s fair to ask about those funds.

Again, I defer to Celene’s expertise and say that just because a fund says it has ESG credentials doesn’t mean it does. One ESG fund was found to be 97% the same as its original index. It may be that greenwashing won’t end with clothes.  Ask for details of which business sectors the fund is invested in, or details on carbon intensity.

Much is often made of the ‘changing from the inside’ approach when it comes to investing with a purpose. Fund managers claim to impact company behaviour as shareholders. But is it really happening? There have been difficult questions asked of some ESG fund managers, especially in the U.S., after some were shown to be supporting original management decisions rather than ESG proposals around environmental and social issues – including voting down diversity disclosures.

You could ask your provider for details of their voting actions and for the actions of those funds in the default. Look to see how many companies they’ve excluded and what divestment they’re doing.

Bigger companies have more choice. Instead of taking the default fund from a provider, they can build a bespoke one. But thankfully for smaller companies, pressure for change will continue to come from legislation. It’s too big an issue to go into here, but the Taskforce on Climate-related Financial Disclosures (TCFD) measures is already having an impact. That will continue.

But you should engage on the subject with your employees, advisers, and providers. Employees have differing views on these things, largely along demographic lines, but not exclusively. Can you reflect those in the choices available to you? Your advisers should be able to show how your existing position is aligned, or otherwise, with your corporate values and consider ways to reflect the wishes of your employees. And finally – if you speak with them directly – challenge your provider. Only by letting them know that these things matter can we drive change.