Pension providers and asset managers have a growing responsibility to consider environmental, social and governance factors as investors increasingly want to know their money is being invested ‘for good’, a new report by law firm Herbert Smith Freehills and mutual insurer Royal London has shown.
The report, released ahead of new ESG rules coming into effect on 1st October, found 57% of those with a pension believe that investment managers should ensure holdings are managed in a way that is “positive for society and the environment.”
From the start of October, pension scheme trustees will have to set out their policy on how they take account of financially material factors, including ESG considerations, in their investment decision making.
Smith Herbert Freehills and Royal London said their research showed that considering ESG factors is becoming more relevant to optimising financial returns and effective risk-management by pension schemes and asset managers, in stark contrast to the past when they were largely considered by many as non-financial factors. According to the report, multiple studies have shown that there is generally no reduction in returns from ESG investing and in many cases, investors can benefit from improved returns.
The report also warned that pension providers and trustees who fail to take account of ESG factors face the risk of legal challenges, following a case in Australia where a member is taking a large pension fund to court for failing to disclose information on the potential impact of climate change on his investments.
Samantha Brown, head of pensions at Herbert Smith Freehills, said ESG was no longer an “optional extra” for pension providers, trustees and asset managers but something that must be integrated into decision making.
Brown said: “It is essential that trustees and providers are able to demonstrate that they are taking ESG factors seriously and that they don’t just treat this as a tick-box exercise. There is a growing risk of legal challenge for schemes that fail to do this. Failure to act also runs the risk of causing reputational damage to the scheme and also the scheme’s sponsoring employers.”
Steve Webb, director of policy at Royal London, said: “The flow of new rules from government and regulators, both at home and abroad, is going in only one direction – trustees and asset managers are going to be expected to take much more account of ESG factors in their investment decisions in the future.
“The good news is that the balance of research suggests that this need not only involve sacrificing returns and in some cases can generate enhanced performance. Those responsible for managing other people’s money will need to ensure that they are not behind the curve when it comes to taking account of these important issues.”
