Moving towards a greener form of capitalism

Choosing a pension scheme with a clear focus on the relevance of good corporate governance, how companies manage their relationship within the society they operate and their impact on the environment not only makes sound investment sense but is also likely to chime well with the workforce. Paul Todd explains

For businesses striving for sus-tainability, a new opportunity may be coming their way to contribute to the ‘greening’ of global capitalism.

By 2018, all UK businesses will by law need to automatically enrol employees aged over 22 and earning more than £10,000 into a pension scheme. These pension pots are likely to reach a half a trillion pounds by 2030.

Employers will not only be contributing a good chunk of that sum themselves – they have to put in at least 3 per cent of a minimum 8 per cent of employees’ qualifying earnings – but how they approach this legal duty could also have a big impact on what happens to that money and where it is invested.

Pension funds are among the biggest institutional investors in the world. That means they control the flow of billions of pounds which is invested in companies, property and lent to governments here and around the world.

The choice over which pension scheme to enrol workers into and how to communicate with them about it falls to employers, making them not insignificant brokers in this multibillion pound market.

Recent NEST research found that nearly three quarters of small employers, who will start enrolling staff from next year, say the investment approach of a pension provider will be important when choosing a scheme to use.

This is no doubt because they want the best outcomes for workers, but could also be because they understand what motivates them. A strong sense of organisational culture and values can, according to a number of studies, help drive business success and staff satisfaction. So finding a pension provider with investment values that match those of the organisation may have a number of benefits.

A recent survey by the National Association of Pension Funds (NAPF) found that when pension savers understand that their money is invested in the wider economy, they want it invested in a way that supports companies’ long term futures, upholds worker rights, avoids bribery and corruption and supports human rights and environmental sustainability.

Choosing a pension scheme with a clear focus on the relevance of good corporate governance, how companies manage their relationship within the society they operate and their impact on the environment not only makes sound investment sense but is also likely to chime well with their workforce.

In addition having a fund choice that is specifically designed to meet certain ethical concerns is likely to be important to many workers too. NEST research into members’ attitudes towards pension saving suggests there is a clear desire for many to be able to invest according to ethical or religious beliefs.

Interestingly, the research we’ve undertaken into the concerns of consumers who say they’d welcome opportunities to invest ethically indicates that people are not as concerned about traditional ethical no-go areas like alcohol or gambling. The main things concerning the people we asked were social in nature and often global in scope. Labour rights in the UK, human rights abuses, child and forced labour, corrupt regimes and environmental and ecological damage.

These are the types of issues that businesses working in the sustainability sector or striving to improve their ethical performance understand. Institutional investors like pension schemes may exclude companies on the basis of bad practice in any of these areas – and this is one of the drivers for decision making in the NEST Ethical Fund. But equally important is positively reinforcing good behaviour through proactive investments in companies that do perform well and are contributing positively to environmental and social sustainability. By choosing to offer a pension scheme with this type of fund to their staff, such businesses could indirectly be helping increase the level of investment available to companies like theirs.

Corporate social responsibility professionals will know that good ethical credentials are increasingly important to firms’ image, with the ethical consumer market growing rapidly in the UK to more than £54billion in 2013, triple the size it was just over a decade ago.

This trend may not have yet translated into a significant take-up of ethical pension funds. But that doesn’t mean the demand isn’t there. Low take-up is more likely a symptom of a wider issue – mainly the fairly commonplace misconception many people have about what happens to their money when it’s in a pension. Most don’t realise it’s invested at all, and if they did, the concept of investing is still quite far removed from their day-to-day interactions with shops and businesses. As automatic enrolment brings millions more people into pension saving and their pots begin to build up, we expect engagement in where that money is going to rise as well.

Clear communication can also help empower people to make choices. Making investments tangible to members is one way that may help bridge the gap in people’s understanding of what happens to their money when it’s in a pension. For NEST, with our Ethical Fund, this means making it clear to members that companies that abuse human rights or that pollute the environment will be avoided, while instead the money will be channelled to companies that are trying to improve energy efficiency, create better social environments or make progress on global health issues, for example.

This is one aspect of our no jargon approach which helps employers give their staff appropriate and easy to understand communications about the NEST pension scheme and the different fund choices on offer.

Behavioural science suggests that ‘pro-social’ spending can make people happy. Knowing that your money is going towards helping other people has a positive impact on wellbeing and happiness. So helping employees understand that they can invest their pension savings in an ethical fund and where that money goes, could have a positive knock on effect on staff morale.

Ultimately, choosing a scheme that has a strong focus on responsible investment and a well thought-through ethical fund, will ensure that the hard-earned money employers and employees put in works with the grain of long term sustainability.

Paul Todd is assistant director of investment at NEST. NEST has been established as part of the government’s workplace pension reforms, known as automatic enrolment. It is run by an independent Trustee on a not-for-profit basis with a duty to act in the interests of its members. 

Image credit: Unsplash/Micheile Henderson