There’s a growing recognition that you can align your investments with your values. But what’s the impact of Environmental, Social, and Governance (ESG) factors on pension investments?
What’s ESG investing?
ESG investing involves evaluating companies based on three factors:
Environmental - assessing a company’s impact on the environment. This includes carbon emissions, waste management, and resource utilisation.
Social - examining relationships with employees, suppliers, customers, and communities. With a focus on labor practices, diversity, and community engagement.
Governance - evaluating corporate leadership, executive pay, audits, internal controls, and shareholder rights.
Incorporating these factors helps investors identify companies that are both:
financially sound; and
committed to sustainable and ethical practices.
The rise of ESG in pension funds
More pension funds are adopting ESG criteria in their investment strategies. This is driven by a growing awareness of:
climate change;
social issues; and
the long-term benefits of sustainable investing.
Research suggests companies with strong ESG practices are often better positioned for future challenges. These companies are therefore more likely to achieve better long-term performance.
Impact on pension performance
ESG factors can impact pension investments and influence performance in several ways:
Risk management - companies with poor ESG practices may face a number of penalties. Examples include regulatory fines, reputational damage, and operational disruptions. These can all negatively impact financial performance.
Long-term returns - companies committed to ESG practices are often more innovative and adaptable. This could potentially lead to better long-term financial returns.
Investor demand - the growing trend around ESG is driving companies to improve their practices. With this they hope to potentially enhance their market valuation.
Challenges and considerations
Despite the benefits, incorporating ESG factors into pension investments presents challenges. This type of investing is still fairly new so there’s less data available, processes are newer and guidelines are still being developed. Pension fund trustees need to ensure they aren’t compromising financial returns while balancing these factors.
The future of ESG investing in pensions
The momentum behind ESG investing in pensions is expected to continue growing. Institutional investors are increasingly recognising their role in promoting sustainability and ethical practices. By focusing on ESG factors, pension funds can achieve two things. Firstly, they’re contributing to positive societal outcomes. And secondly, they’re fulfilling their primary objective of securing financial returns for beneficiaries.
ESG investing represents a significant shift in the approach to pension fund management. By considering environmental, social, and governance factors, pension funds can:
align their investment strategies with broader societal values;
potentially enhancing long-term performance; and
contribute to a more sustainable future.
PensionBee offers customers a pension plan that selects investments using ESG criteria. The Climate Plan invests in more than 800 publicly listed companies globally that are actively reducing their carbon emissions and leading the transition to a low-carbon economy.
View our pension plans page to learn more about the Climate Plan and the other plans we offer.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
