Responsible investment funds set a new monthly record for sales in March 2021 as ESG investing grows in popularity. Net inflows of £1.6bn for the month saw responsible investment funds under management stood at £66bn as at the end of March, according to the Investment Association.

One area of responsible investing with particularly strong growth is ESG. This latest insight looks at ESG investing, what it is and how it impacts workplace pensions.

Employers and advisers reviewing the default fund options for their workplace pensions over the past year may have noticed ESG options being added to their choices, with many providers for the first time.

But what does ESG actually mean?

For many workplace pension members, the value of their investments is no longer soley about what money it can make them, many also care about the positive impact their money can have in the world. This is where ESG investing can come into play. Environmental, social and governance (ESG) investing is on the rise.

By taking an ESG approach to investing, a fund/investor takes ESG criteria into account when they are considering investing in an asset within a fund. If a fund manager was looking at investing in a firm, they would look at its environmental impact, social factors such as community engagement and employee relations, and they would look at the company’s governance (ie the way the business is run, such as quality of management and the diversity of the board.)

Drilling down further, some responsible investment funds are focused on specific sustainable outcomes. The way pure ESG funds differ is that unlike wider responsible investment funds who focus on excluding sin stocks like tobacco or gambling, ESG goes a step further by focusing on the good as well as the bad.
Rather than simply removing all sin stocks, an ESG approach instead looks to include assets that score highly on environmental, social and governance factors. Therefore, investors instead of just knowing their money is not invested in anything bad, can also be reassured their money is being put into firms that have actively been identified as doing good.

For employers with a workforce who are highly engaged with their workplace pensions, ESG can be incredibly popular. It is also not just popular with the young ‘woke’ generation, older pension savers are also increasingly aware of ESG values.

ESG is increasingly on the radar for financial advisers too. Recent research from Standard Life found more than three quarters (83%) of advised investors said they would value a conversation about investing sustainably.
In the past, ESG funds were more of a side show with little money pumped into responsible investing due the perception that returns from these style of funds was much lower than their traditional counterparts.

However, research has now shown that this is not that case and that ESG funds often outperform their peers.
ESG funds actually outperformed their non-ESG peers in three major equity markets in 2020, according to research from investment manager Willis Owen.

The global Coronavirus pandemic has also served to push more money into ESG with a sustainable focus and governance elements helping the long-term investment performance of ESG funds and as people become more conscious of making sure their money does good. With some less ESG-friendly sectors, such as oil and gas and airlines, underperforming during the pandemic, this has also served to push more investments towards ESG funds.
Essentially in the most basic terms, ESG puts returns and responsible investment on more equal terms. The aim is not just to make sure that your workplace pension investment is ethical, the main objective remains financial performance as with any investment.

We are currently creating a new question set within our analysis to benchmark providers in this growing space. As a provider or adviser, if you have any specific views or thoughts which you would like to be considered, please reach out to jason.green@ftrc.co.uk who would be happy to talk with you.