Victoria Derbyshire’s father taught her when she made contributed to a pension, she wasn’t saving but “spending on her retirement”. The distinction is helpful in differentiating a risk-driven action- “saving” from one that promises deferred gratification- “spending”. For most people spending is more pleasurable than saving; “spending on retirement” consequently seems more engaging!
The FCA is considering in their 2018 business plan requiring the Independent Governance Committees (IGCs) to include Environmental, Social and Governance (ESG) as “value” factors in assessing the performance of their insurers. I will generally refer to ESG in this article as “Responsible Investing” – this is how the public recognise it.
Should the FCA be approaching this issue from a risk perspective, or should it be encouraging IGCs to be promoting Responsible Investing as a value enhancer? This is much the same question as whether you are saving against a rainy day or spending on a sunny retirement. Pension Expert published a summary of the reasons why fiduciaries should comply with ESG reporting requirements in a comment piece, supported by NEST “Is ESG on course to become the norm in DC defaults?”
In the interests of balance, this article is less about compliance and more on the value of spending on Responsible Investing to get better outcomes.
A 2017 study by Schroders found 78% of people surveyed said sustainable investing has become more important to them. Despite this, there is little information available to inform savers on how their pension is invested – research by UKSIF has shown 76% of the UK public with a pension don’t know how much, if any, of their pension is invested ethically, and 30% believe they don’t have a say on how their pension is invested.
Turn these numbers around and organisations such as Share Action argue that were workplace pension providers and their fund managers judged on their ESG disclosures, policyholders would not just be more interested, they’d be more discerning.
DC investors have the scope to deliver patient capital to the market. Dr Con Keating has recently argued that the extended time horizons of DC claims means investments can be judged, not on short-term performance measures, but on their longer-term utility. Social Environmental and Governance measures may be better ways of judging value than a short- term focus on performance. Certainly, a balance is needed between a quantitative analysis of recent results and the capacity of a fund to deliver good outcomes over time.
In this sense, what members see as important (responsible investment) and what IGC Committees measure value by could be better aligned if the FCA’s proposals on Responsible Investment are adopted.
Value is of course, only part of the equation, if the cost of investing a workplace pension responsibly is considerably higher than not, then the value for money arguments are diluted and the commerciality of a workplace pension compromised. It ill behoves a sustainable investment to threaten the sustainability of a pension provider!
What evidence we have of the cost of properly adopting ESG factors into an investment approach can be found in the relative prices of LGIM’s passive global equity fund (0.10%) and its “Future World” equivalent. The Future World global equity fund is available on the LGIM workplace pension at (0.24%). Whatever your view of this price difference, Responsible Investment cannot be considered a free lunch.
In the 2017 reports, (published April 2018), almost every IGC reports on Responsible Investment. The reporting is yet to be integrated with the IGCs value for money analysis and is of variable quality with much evidence of “cut and pasting” from prepared statements from providers. But this is an improvement from previous years and clearly signposts the direction of travel.
A consistent theme of IGC reports since their inception in 2015, has been the difficulty IGCs have found in getting policyholders to engage either in their workplace pensions, or indeed the IGC reports. Perhaps they too should think of Victoria Derbyshire’s distinction. Would policyholders be more interested in spending time on their pensions if they had a clear social purpose? Today most people seem to be saving time – ignoring the reports altogether.
This article first appeared in Pensions Expert, you can find it by following this link.
I see that when this article was published on the Pensions Expert website it was given the title ‘How would extending the remit of IGCs to cover SRI boost outcomes?’. This illustrates part of the problem – that ‘Socially Responsible Investing’ is used by some interchangeably with ‘Responsible Investing’. The former is heavily associated with the idea of investing in order to achieve some kind of social good. The latter is, or should be, an umbrella term for any strategy that looks beyond the normal performance risks. For most trustees, ‘responsible investing’ is much the more useful term, and something they should just be doing anyway. If they or their members then want to layer on an ethical or social good element, purely for the sake of a positive social outcome, that’s fine. But it’s not mainstream and it detracts from the powerful argument for RI.
I agree with your comments Simon, but the problem is that the FCA and others muddle these terms up – so they are often used flexibly by means of a sensible compromise! This is a bit of a shame – but in practice this means it is incumbent on the author to say what they mean. Henry looks to be aligned with your thinking (ie it is about RI – as you put it).
For preference I use the term SRI as the catch all label (by which I mean ‘Sustainable and Responsible Investment’. My thinking is that sustainability (‘climate risk’ in particular) is so integral to this area that it needs highlighting as often as possible.
The challenge with ‘RI’ is that some of of the industry uses that term almost interchangeably with ‘governance’ (perhaps because it is easier to quantify and deliver on?!) .
Governance is hugely important of course – but does not compare with getting sustainability analysis right in my view – as that has a direct line into protecting the planet for future generations (and therefore financial implications also of course!)