Employers should ensure all their funds are being managed responsibly, as a minimum.
Many schemes also offer an ethical fund option for members. With the shift from defined benefit (DB) to defined contribution (DC) schemes, staff should be allowed to ensure their investments are managed in a socially and environmentally responsible way.
Responsible investment overall does not have to be just through an ethical option. There are many misconceptions and assumptions that responsible investing only entails exclusions of ‘sins’, such as tobacco companies, from investments. But the concept is broader than just exclusions, recognising the need to consider wider management of risks that are not always immediately financial in nature but have longer-term implications.
The financial implications of environmental, social and governance (ESG) risks, such as climate change, resource scarcity, labour standards and good governance, are becoming increasingly apparent and are of particular relevance to long-term investors, such as pension funds.
Considering ESG issues in terms of potential risks and protecting shareholder value is very relevant to pension funds. Apart from case studies such as BP’s Deepwater Horizon disaster in 2010, there are many other potential risks that can affect financial returns, for example clothing retailers with supply chains in high-risk countries can carry a high level of reputational risk related to labour standards, as was seen with the Bangladeshi building collapse in April.
Pension funds are one of the largest and most influential asset-owning groups. By taking a lead and implementing good stewardship of beneficiaries’ assets, they can exert pressure on investment institutions to encourage more sustainable behaviour and drive better awareness of ESG risks and issues, such as fair employment, good governance and environmental sustainability.
Claire Curtin is client relationship manager at Ethical Investment Research Services (EIRIS)