Written by Tom Selby, head of retirement policy at AJ Bell
There is a multi-trillion-pound wall of UK pension scheme money that, if effectively marshalled, has the potential to fundamentally shift the way companies around the world operate.
It is therefore no surprise various interested parties – from governments to national treasure Sir David Attenborough – are focusing so closely on how pension schemes invest on behalf of millions of members.
Much of this focus so far has centred on the ‘environmental’ part of ‘environmental, social and governance’ (ESG) investing. This in part reflects the devastating potential long-term impacts associated with climate change, and in part the fact environmental effects are easier to measure. The amount of carbon dioxide a company belches out can be tracked and reported, for example, as can global temperature changes.
Social factors, by contrast, are notoriously tricky to pin down and require assessments to be made about whether a company, sector or country is acting in a way that is ‘good’ for society in the short, medium and long-term. This can feel a bit like the investing equivalent of catching smoke.
By creating and leading a taskforce focused specifically on the ‘S’ of ‘ESG’, pensions minister Guy Opperman is hoping to provide tools schemes can use to track the social impact of investments, share best industry practice and, perhaps most importantly, drive all aspects of ESG investing up the agenda of UK pension schemes.”
Russia’s invasion of Ukraine encapsulates the ESG challenge
The situation that has emerged in Ukraine encapsulates the challenges inherent in ESG investing. Prior to Vladimir Putin’s invasion of the country, many would have argued that investments in weapons companies could not be associated with an ESG approach.
However, many would now argue weapons being used to defend against an unwarranted and barbaric attack – as is clearly the case in Eastern Europe – are in fact enabling a social ‘good’.
The Government acknowledges the challenges inherent in both measuring social factors and choosing which factors to focus on. It is inevitable that what is deemed a positive or negative social factor will shift over time.
Environmental, social and governance issues are also often interlinked, with climate change potentially driving future challenges linked to food and job security.
Given these complexities, perhaps the biggest role the Government can play is in corralling the industry and ensuring ESG remains front-and-centre of people’s thinking.
However, it is ultimately the financial impact of these factors that will likely drive investors’ decision-making.