Something mi__ing: Pensions and the S in ESG

Image source: navexglobal

ESG investing has been rising greatly in prominence in recent times, from growing awareness within the financial services workforce and from consumer demand, meaning that ESG funds are now forecast to outnumber conventional funds by 2025.

However, there is a notable, and increasingly documented, imbalance in consideration between the ‘E’, ‘S’ and ‘G’ factors. When viewed in the context of climate change, it can be argued that social factors are getting left behind.

The recent IPCC report rightly puts the sometimes literally burning platform of climate change at the top of many people’s agenda ahead of the climate conference in November. One challenge of climate change is that as the effects are beginning to be felt, it is increasingly too late to reverse much of the ‘baked-in’ warming that exists in the Earth systems for the remainder of our lifetime. Meanwhile, social issues that have existed in society since time immemorial, are a daily lived reality for millions of people and remain. How then, can we prioritise and tackle these two seemingly intractable issues together?

We believe that a mobilsed economic system, including businesses whose business models are centered around solving these issues, are part of the answer. Other parts of the system include the policies and laws set by the Government, the flow of capital from investors and the demands made by all of us as customers.

We recently organised a roundtable with senior leaders from the investment industry and campaigners for responsible finance as well as the Parliamentary Under-Secretary of State at the Department for Work and Pensions, Guy Opperman MP, specifically to discuss the S in ESG especially in relation to pensions. Pensions investments are a particularly interesting part of the financial system as they typically involve long time horizons and low risk thresholds, which can lend itself particularly well to the type of investment that could go hand in hand initiatives to drive social change.

In this post we will describe a couple of the key topics, but would suggest checking out the full report for more of the discussion.

Naturally, one of the key topics that emerged was transparency. Predictably, one discussion point related the difficulty of defining and measuring social impact metrics and being able to represent complex intertwined social factors as rows in databases.

“Everything's about data, who cares about the people anymore?”

However, the reality is that there is a current dearth of information and that there is a necessary requirement for more basic information to be collected.

“[The intention is] fundamentally about bringing humanity back into finance, where it's been stripped out.”

These are well recognised issues and stunning amounts of work is being carried out to define a consistent taxonomy for recording and reporting social impact.

A second discussion on transparency focused on the downstream benefits. While a pensions dashboard that brings all of an individual's pension information into one place is being created, there were calls to add transparency of impact into the development scope. Why? With awareness of the impacts of investments that are made on our behalf, we would have greater agency to demand changes.

Times have changed since the pensions infrastructure was established. As a population we have more information at our disposal that can be used to help us make more informed decisions. As one participant said:

“Let's democratise pensioners' rights, because the pension schemes were built on a paternalistic model […] and that is still there in the structure. If pensioners, individual pensioners, understand what their investments are doing, they can then have a voice with their pension, in the same way we elect our government and we ask our government to spend our tax money, we could also, in a sense, influence our money that's within the pension”.

That is a powerful statement for those that are passionate about responsible finance. If the train towards transparency is set in motion, is greater agency for pensioners inevitable and just a matter of time? If that is the case, is there an argument to accelerate change?

Many other topics were discussed including place-based impact investing, the spectrum of capital, the role of consultants, education and awareness of ESG, incentive structures and consolidation. Visit our site for the full summary of the session www.re-generate.org/esg-roundtable-2021.

The summary describes the topics that emerged and creates a narrative of the main discussion points. It identifies where there was general consensus on a topic and if there were different opinions, where they digress. We have highlighted ideas that were made as opportunities for further exploration.