What do I need to know about ESG?

• Environmental impact is perhaps the most obvious and talked about factor. It covers fossil fuels, single-use plastic, palm oil plantations and the many other activities that threaten our climate and ecosystems. 
• Social responsibility addresses considerations such as the opioid crisis, gambling addiction, gender discrimination and human rights abuses. 
• Governance standards consider the systems in place to manage cyber security, accuracy of reported accounts, gender diversity on boards, executive pay and many other indicators of how well a company is being run.

How can fund managers influence these issues when deciding how to invest our money? 

The most obvious way is to avoid investing in companies with poor ESG performance, but there are other tools at their disposal. As shareholders in a company, they can and do vote on resolutions at Annual General Meetings and require the company’s management to meet them to discuss corrective actions. In the last few years, the ‘E’ in ESG has taken on a more positive slant too. Many fund managers now seek out companies whose activities will have a positive environmental impact, such as renewable energy and new approaches to water management.

What is our pension scheme doing about ESG? 

Under legislation, which came into effect on 1 October 2020, Trustees must outline their approach to engagement with and voting of their shares in investee companies, and how they take account of financially material factors, including ESG and climate change considerations, in investment decision making. This approach has been included in the Scheme’s Statement of Investment Principles (SIP). 

The Trustees have also just completed a round of face-to-face interviews with all our fund managers, dedicated to this topic. We are very encouraged to learn that this has moved well beyond ‘box-ticking’ to really meaningful actions. We have been given many examples of significant changes in allocation of funds because of both ESG concerns and opportunities, and interactions with senior management that have forced investee companies to make serious changes to the way they conduct their business.

ESG is not about accepting lower returns in exchange for the moral high ground. It is a vital element in finding sustainable long-term investments in responsible, well-run, profitable businesses. 
To see an example of how fund managers analyse a company’s ESG credentials, click here. This will show you a case study on Schneider Electric provided by MFS, one of our defined contribution fund managers.

If you would like to know more about our activities and progress on ESG, or would like a copy of the SIP, use the contact details at: www.rspensions.co.uk/contact-us. The Trustees would be very pleased to arrange informal briefings on the topic.