Should DC Schemes Drop The Term ESG?

Defined contribution (DC) scheme members overwhelmingly support making responsible investment the standard policy for pensions investments, but the term ‘ESG’ mostly does not resonate with them, according to a survey carried out by Invesco.

According to the asset manager, the survey was part of “the most extensive research ever conducted into the language of pensions” and captured responses from more than 500 UK DC scheme members.

The individuals were asked if they would favour part of their pensions automatically going to a company that met a certain ethical standard, with 82% indicating they thought it was a “good idea” and 18% a “bad idea”.

More than seven in 10 respondents thought it would be a “good idea” if their scheme included responsible or ethical investment as part of their default fund.

Almost half (46%) of those surveyed indicated they would choose a responsible investment option over a fund that included “all types of companies”, even if it meant lower returns.

The hypothetical return scenarios that survey participants were presented with were 6% a year for the responsible investment option and 6% for a fund that did not discriminate.

If both funds delivered the same historical returns of 6% a year, 60% of respondents said they would rather invest in the responsible option.

Survey participants were also asked for their views on how to best label “a fund that seeks to do good in the world while also generating good returns”, with responses showing that the term “ESG” was unpopular. In the survey, ESG was spelled out as “environmental, social and governance investment”, and was chosen by 14% of respondents as their preferred option.

The term “responsible investment” was the preferred term for 42% of respondents, and “ethical investment” for 30%.

Gary DeMoss, director of Invesco Consulting, said: “The fact that only 14% of respondents prefer the term ‘ESG’ clearly highlights the communication challenge pension [funds] face; this has been amplified by the overuse of industry jargon.

“At a time when it is crucial to encourage employees to think about their financial futures, it has never been more important for schemes to carefully consider their engagement strategies to improve conversations.”

Positive approach

According to Invesco, the study also revealed a preference for positive language when being informed about responsible investments.

Over three quarters (77%) believed that the best way to talk about a responsible investment was to describe it as a fund that “invests in companies that meet standards for doing environmental and social good”.

Slightly less than a quarter (23%) of respondents preferred the term “does not invest in companies that do not meet standards for doing environmental and social good”.

In the Netherlands pension funds and academics have been researching scheme members’ views about how their savings are invested. Tilburg University researchers, for example, found that members were willing to sacrifice some return if their pension fund made sustainable investments, and some schemes have made divestments and impact investments after surveying their members. 

The €500bn Dutch pensions investor APG recently launched a “public-friendly” version of its annual report, which roughly translated is called “Walk with us”. According to APG, the report was cast in an interactive video format, taking viewers on a journey to show them the choices they can make about their pensions. Along the way, said APG, they face a number of “recognisable dilemmas about money, sustainability and the future”. The choices they make determine how the video continues.