The wider impact of investment strategies has a particular appeal to younger pension savers. Jenna Gadhavi looks at the potential of ESG factors

Environmental, social and governance factors have not been major issues for defined contribution pension schemes. But with both a refreshed DC code and a new IORP II (Institutions for Occupational Retirement Provision) directive focusing on ESG and the impact it can have on investments, it’s time trustees and scheme managers sat up and took notice.

And it seems that the younger generations could benefit the most. The investment case for ESG – which is ultimately about protecting savers’ assets – is stronger the longer you’re in the market, because these are often long-term factors that can have financial implications for fund performance, and ultimately income in retirement.

The younger you are, the more prominent ESG factors should be in the investment process.


Many in the industry have welcomed the guidelines on ESG in the Pensions Regulator’s updated code, which sets out standards for trustee boards of DC schemes. It states: “Trustees of UK pension funds should consider ESG factors when making investment decisions, where such factors are ‘financially significant’.”

Catherine Howarth, chief executive at responsible investment charity ShareAction, says: “We were delighted that the regulator has issued this new guidance in the DC code. Although it only covers occupational pension schemes and not the contract-based schemes that are still regulated by the Financial Conduct Authority, it is excellent that we now have 30,000-plus DC schemes in the UK subject to this much stronger guidance on ESG issues. “It will hopefully lead to trustees of the schemes focusing on managing ESG risks efficiently and with due care.”

In her view, this is just the beginning. “It’s great to have ESG guidance in the regulator’s DC code, but it is only guidance rather than being a legal requirement.”

Catherine Doyle, head of DC at Newton, agrees that this development has been a positive one, but that the real change needs to happen in-house. She says: “It comes down to investment style and the investment process that different asset managers have.


“There will be some managers who give great importance to ESG and factor it in – it may be a dominant feature in their investment process – and others where it’s simply not their style.”

Laura Myers, partner at Lane Clark & Peacock, also believes that the new code is a step in the right direction. But she also feels that the onus lies with trustees.

She says: “It’s more up to the trustees now to consider whether they think that it is appropriate to include ESG in the default. What it will do is encourage more people to consider looking at long-term impacts, because DC members do have a long-term time horizon.

At a European Union level the final text of the IORPS II directive has some strong stipulations relating to the inclusion of environmental and social factors in scheme risk assessments.

They will become law in EU member states within the next two years. The extent to which the UK must comply with IORP II is unlikely to be known until the terms of Brexit become clearer, however, and will depend on both the timing and terms of the exit plan.


As well as improving investment governance and making sure trustees comply with regulation, ESG investing could boost member engagement. This issue arises time and time again. It’s thought of as notoriously difficult, and often people don’t read past the first few sentences of scheme communication.

The industry needs to engage imaginatively with the millennial generation in particular about retirement saving as a process and the need to commit to it. In a world in which many people’s wages have stagnated for a long time, it’s all too easy to just defer thinking about retirement savings.

Having a debate with younger members about how their savings are invested and the impact on their communities, as well as the way companies seek profits, could be a really good way to begin a dialogue.

ShareAction’s Howarth says: “I believe that there’s enormous potential to kickstart a dynamic relationship between British people and pensions if we really take an imaginative and interesting approach to ESG communication. We need to make it about stories and big brand names that people identify with and understand.”

Paul Todd, director of investment development and delivery at the government’s workplace pension scheme NEST, is another firm believer that focus on ESG can help member engagement.

He says: “. We want to bring our members closer to the things that they are invested in.”

Todd thinks this is particularly important because it will have a huge impact on how members’ savings grow and the kind of retirements they have.

Others think that it will take something bigger for ESG to make a substantial impact on member engagement.

One of the key things we want is to shorten the investment chain

Newton’s Doyle is one of them. She says: “It’s difficult to know what the catalyst may be – it might be some kind of ecological disaster, it might be a feeling of injustice at the way a company is treating its workforce. But at some point it will galvanise people to think about whether these factors are being considered as part of the investment that they are exposed to. It will become something of value.”

Part of the problem with pensions is that they have felt rather remote and intangible. The scenarios that Doyle describes could link them to everyday life and make them feel more real for many people.


For schemes that proactively want to incorporate more of an ESG focus into their investment strategy rather than waiting for a catalyst, Howarth believes that if you don’t ask, you don’t get.

She says: “Ask about the asset managers’ ESG policies, and within those policies, what their ESG priorities are. You should be finding out what companies they have in the portfolio and what the key ESG risks facing those companies are.”

It’s all about results. Trustees and scheme managers should be asking for evidence that the ESG practice built into the investment process for that manager is reducing risk or helping to drive return.

It’s definitely harder incorporating ESG investing when you need to keep costs down

DC schemes are naturally more cost conscious than defined benefit, but Todd believes this should not be a barrier.

He says: “It’s definitely harder incorporating ESG investing when you need to keep costs down, but that just means you need to find different ways of doing things. The essential thing is having the belief that it’s important and knowing how you translate it: that doesn’t have to be cost intensive. It comes more down to the organisation’s DNA.”


There is still some way to go before the value and importance of ESG in DC is fully appreciated, but it is raising its profile. Over time this should even lead to greater member engagement and better retirement outcomes.