PMI Crest
15 September 2021

6th ITM Student Essay Competition: runner-up Clare Bryant

To what extent will an increased focus on ESG (Environmental, Social, and Governance) improve member outcomes?

The question ‘to what extent will an increased focus on ESG improve member outcomes?’ could be answered from at least two different perspectives – investment or engagement.

In this essay, I will concentrate mainly on member engagement with pensions and how this could be improved by an increased focus on ESG. Members are showing more interest in understanding how their money is invested. Communicating with members about ESG, therefore, has great potential to improve engagement with their pension (and lead to better member outcomes as a result). However, as outlined over the following pages, there are some questions to be addressed that are currently limiting members’ interest in ESG.

Firstly, I will look briefly at the increased focus on ESG investing and the difference that this could make to member outcomes. In the pensions industry, the focus on ESG is gathering momentum. New regulations are being introduced, such as the requirement for schemes to produce reports in line with the recommendations of the Task Force on Climate-Related Financial Disclosures. Since October 2019 schemes have needed to document how they are considering ESG when setting their investment strategy, in a Statement of Investment Principles that is available to the public. Some schemes are beginning to make the step from considering ESG factors to introducing funds that incorporate ESG principles. The Make My Money Matter campaign has introduced a Green Pensions Charter that currently has fifty signatories committed to aligning their pensions with net-zero targets1.

As ESG investing becomes more mainstream we could see better pensions for members where schemes have incorporated ESG into their investment strategy or fund range. Recent studies have found that investing in funds that incorporate ESG principles could generate better returns over the long term. A report by Morningstar in 2020 found that ‘a majority of surviving sustainable funds outperformed their average surviving traditional peer over the past 10 years’2. According to the Morgan Stanley Institute for Sustainable Investing in the US, ‘an analysis of more than 3,000 U.S. mutual funds and exchange-traded funds (ETFs) shows that sustainable equity funds outperformed their traditional peer funds by a median total return of 4.3 percentage points in 2020’3. These figures look positive for ESG investors, but it is possible that the good returns will not continue over the long term. The 2020 figures could partly be the result of a very unusual year or could be a ‘one-off’ due to greater interest in ESG funds.

If ESG funds do continue to outperform, it would be important to make sure they are part of the default investment option for DC schemes, as this is where most members’ pension pots are invested. In addition, continuing to invest in funds that don’t take ESG factors into account could leave the scheme exposed to risks that have a negative impact on the value of members’ pension pots or scheme funding levels.

Arguably a greater potential to improve member outcomes for DC scheme members lies in something that is more difficult to measure than the impact of ESG investing - the link between ESG and member engagement. A majority of pension scheme members could be described as ‘not engaged’ with their pension, but many of the same people would want to know that their money is being used in a positive way, or at least is not invested in a company that they perceive in a negative way. An LCP / YouGov poll conducted in 2020 found that ‘significant proportions [of those surveyed] would be willing to accept a slightly lower return on their pension investments to invest in companies that care about employee wellbeing (47%), environment (46%) and fair trade (39%)4. This interest in investing responsibly then leads to more interest in pensions generally. A study conducted by the DC Investment Forum found that 67% of those surveyed felt ‘that Responsible Investment would want to make them engage more with their pension and find out more about it5.

The interest in ESG in relation to pensions is gradually beginning to transfer from the pensions industry to scheme members, and popular campaigns such as Make My Money Matter, mentioned above, have been helping to bring the subject into the public consciousness. As scheme members begin to take notice of how their money is invested, they will also begin to understand their pension better and actively make changes (such as increasing their contributions or managing their own investments) that will improve their income in retirement. However, there are some questions that are limiting levels of member engagement, which are outlined below. The following points are of most relevance to members of occupational Defined Contribution schemes, but some could also be relevant for master trusts or GPPs.

What do we mean by ESG?

ESG encompasses a wide range of different issues, from climate change to labour standards to bribery and corruption. Acronyms are not easy to understand, and ESG is particularly difficult because it is ‘an umbrella term used to cover a wide range of factors that traditionally were regarded as “nonfinancial” or “extra-financial”6. If people have heard the term at all, they generally tend to focus on the issues that fall under the ‘E’ rather than the ‘S’ and the ‘G’ – the term has associations with climate change rather than the social and governance factors. There doesn’t seem to be an agreed single definition of what ESG means.

A report by Nest and LGIM found that ‘‘ESG’ is unlikely to be a term that engages pension scheme members effectively’. Their research found that ‘The phrase ‘responsible investment’ seems to work better’ as it is more evocative, it conveys ‘prudence and safety in the way that pension money is looked after for the member at the same time as communicating a focus on investing more sustainably for the future7. Although easier to understand than ESG, the term responsible investment could be misleading as well; does it imply that the other funds are ‘irresponsible’? To further confuse people, terms like responsible investment or sustainable investment are often used to mean the same thing as ESG, but sometimes they are defined differently. Until there is a single, easy-to-understand term that is used throughout member communications then this will be a significant barrier to engagement.

Do members understand pensions and investment? There is a need for more education around pensions and financial wellbeing alongside the increased focus on ESG. Hargreaves Lansdown found that ‘Only one in three people out of just over 1,000 [they] asked knew their pension was invested in the stock market. The rest said it wasn’t or they didn’t know8. Automatic enrolment has done a lot to help more members to save a little by default, but it has also increased the number of people that are paying into a pension without knowing anything about it. Getting people interested in ESG and where their pension is invested will be difficult for the proportion that don’t engage with investment at all.

Are trustees communicating with members about ESG? Helping members understand what is happening in their scheme is really important, but it is often seen as an afterthought. Where schemes are making positive steps towards incorporating ESG considerations into their DB strategy or their DC investment range, a lot of the benefit (particularly in occupational DC schemes) will be lost if the members don’t know that it’s happening. Even if the trustees are not planning to make any immediate changes, they could still begin to communicate with members about ESG; for example, trustees could explain their Statement of Investment Principles in a way that is easy to understand, survey members to better understand their views on ESG, or provide some general education about ESG and what it means.

Linked to this, in a DC scheme the investment range needs to be clearly set out and members need enough information to be able to make an informed decision. If there is an overwhelming number of funds in the range, then members who are interested in choosing their own investments won’t know where to start. Likewise, if ESG funds are available but members aren’t made aware of them, schemes will be missing out on an opportunity to engage members.

Are there enough ESG investment options available? As mentioned earlier, while schemes must now consider and report on how they have considered ESG, that doesn’t mean that DC schemes are all actively making changes to the options that they offer members. Some schemes are starting to make significant changes, offering low-carbon and sustainable equity funds to members, or incorporating low-carbon funds into the default option. Other schemes seem to be taking a much more tentative approach. Once offering ESG options in DC schemes becomes more mainstream it will be easier to engage members by helping members to understand that they have the opportunity to invest responsibly.

Not everyone is interested in responsible investment – what would this group look like? Finally, ‘a 2019 survey of Nest members found that just over half (52%) said they were interested in where their pension is invested, 37% said they were neither interested nor disinterested and around one in ten (11%) said they were not interested9. So, if the survey is indicative of the UK population, then in theory ESG would engage a slim majority of members, but it won’t be the right approach for everyone. Some members might be concerned that investing in ESG funds might negatively affect their returns; others might be actively opposed to ESG investing as they do not agree with the principles behind it.

There is potential for an increased focus on ESG to make a real difference to member engagement with pensions, but there isn’t currently enough noise to make a real difference. In addition to the above factors, there needs to be a catalyst, something to speed up the pace of change. The anti-plastic campaign is an example of a movement that took off seemingly over a very short period but has now become ‘a worldwide revolt against plastic10. Terms such as ESG and responsible investing are buzzwords for 2021 – they need to become much more familiar for scheme members too. The popular movement would then help to speed up change in the industry as well. With the 26th UN Climate Change Conference held in Glasgow this November, and the opportunity to ‘build back better’ after the pandemic, events could combine to make 2021 the year for real change.



2 Hortense Bioy and Dimitar Boyadzhiev, How Does European Sustainable Funds' Performance Measure Up?, p3, (June 2020)

3 The Morgan Stanley Institute for Sustainable Investing, Sustainable funds outperform peers during coronavirus, (24 February 2021), 24 February 2021

4 Lane Clark & Peacock LLP, (12 February 2020)

5 Janette Weir, The Key to Unlocking Member Engagement: A Report for the DC Investment Forum, Prepared by Ignition House, (DCIF, 2020), p8

6 Paul Gibney, Claire Jones, Sapna Patel and Ada Chan, Lane Clark & Peacock LLP, A guide to E,S,G in investment - environmental, social and corporate governance factors in investment processes, (March 2021), p2

7 Jo Phillips and Will Sandbrook, Nest Insight, London, Responsible investment as a motivator of pension engagement, (2020), p6

8 Michelle Branco, In the dark over pensions? What you don’t know could haunt you later, (17 September 2020)

9 Jo Phillips and Will Sandbrook, Nest Insight, London, Responsible investment as a motivator of pension engagement, (2020), p29

10 Stephen Buranyi, The plastic backlash: what's behind our sudden rage – and will it make a difference?, (13 November 2018)

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Last update: 17 September 2021

Clare Bryant
Clare Bryant
Lane Clark & Peacock LLP
Associate Consultant

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