Sustainable Pensions for a Better Planet.
The UN defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” To support the long-term ecological balance, we must fight to achieve Net Zero globally and this is where ESG comes in.
So what does ESG represent?
ESG investing is sometimes referred to as ‘sustainable investing’, ‘responsible investing’, ‘impact investing’, or even ‘socially responsible investing’. In a nutshell, there are three key aspects to ESG investing —the environmental, social, and governance aspects.
ESG values have gained traction with customers recently especially with events such as COP26 providing a greater understanding of the damage unsustainable policies are doing to our planet. For most of us, these values have a practical purpose which align with our core principles.
There are trillions of pounds in UK pensions and there is growing evidence that as savers we want our money to be invested responsibly. As much as pensions can be confusing, our choice of investment funds really does matter! Whether you have a workplace scheme or a personal pension – investment options can be managed according to ESG principles and customers are increasingly demanding these investment options.
Following Russia’s invasion of Ukraine has made supporting sustainable development very concrete, especially when it comes to investing pension savings. People may have invested in emerging markets as they could provide relatively high returns however some of the largest pensions providers agree that the invasion is morally wrong leading to investment being pulled away from Russia. In such situations, there is a clear view on social and environmental reasons that are important to members.
Although more of us are making conscious choices to support a sustainable future, investment in ethical pensions does have some drawbacks; the main one often being an increased annual management fee. The fees can range from 0.3 per cent up to 1.25 per cent depending on the plan you choose and the size of your pot which is often higher than the fees charged for management of traditional funds. This seems inconsistent with a desire to encourage people to do the right thing. Ethical investing should be encouraged rather than penalising customers with a fee for choosing to make a positive difference to our world.
The other big question is around pension performance; there is plenty of evidence which suggests a positive trend between ESG and pensions. Sustainable investments can do just as well or even outperform, non-sustainable investments. However, as with any investment, returns are not guaranteed, and you may not get back what you have put in. Research is key to compare sustainable versus traditional pension funds before deciding on the level of risk you choose to take. Higher management fees and poor performing sustainable funds hinder people switching despite their good intent.
Member engagement with pensions is generally low, largely due to lack of knowledge about options available, people fail to see the long-term benefits, gender and age-related differences and misalignment with life priorities. However, a recent report by Nest (‘Responsible investment as a motivator of pension engagement’) highlights that sustainable investment has the potential to increase pensions engagement, prompt action and build trust with pension providers. There are business advantages for those brands who embrace the principles of sustainable investing, not only to increase brand magnetism but a vision that supports change to build an emotional connection which are key to driving customer loyalty.
The industry anticipates that sustainable product development will continue to increase over the coming years as well as growing customer interest towards ESG. We know from our loyalty research, that there are clear opportunities for brands to align with customers’ ideals, creating brand magnetism that ultimately has a positive effect on the top line. Customers who care deeply about ESG values are prepared to pay higher management fees so long as the fund truly matches their beliefs.
There is also undoubtedly a role for pension providers to play when it comes to educating the public – and additional barriers that could be removed to attract even more customers – but the ESG audience is unique in so far that it is quite willing to pay more for a service that’s modus operandi is traditionally opaque.
There’s real room for growth in this sector and we’re excited to see what the future brings.
For more information on how to create loyalty with customers, please get in touch.
Bhumika Gandhi, Associate Director
