Is your defined contribution pension aligned with your companies ESG policies and goals? 

Many defined contribution (DC) pension schemes do not live up to the company’s ESG policies and goals.

Environmental, social and governance (ESG) factors are high on the corporate agenda as businesses respond to political, investor and public pressure to behave sustainably and be good corporate citizens.

Yet many companies’ ESG policies and goals do not extend to their DC pension schemes.

Analysis of companies that took the Mercer DC MOT shows that more than half of schemes either weren’t invested in line with their company’s ESG policies, or the company was not aware of how ESG was being integrated into its scheme.

Here are some of the main reasons why you should examine the ESG credentials of your pension scheme:

  • Risk and return:
    ESG factors can have a financial impact on investments.  Long-term sustainability issues, particularly climate change, present risks and opportunities that increasingly require explicit consideration. 
  • Stakeholder expectations:
    Stakeholders are likely to take a dim view of pension schemes with poor ESG integration. Changing industry norms and expectations from the company, employees/members, shareholders and customers will demand schemes with strong ESG integration in both policies and investments. 
  • Reputation:
    Campaigners have targeted companies’ corporate ESG impact for many years and the spotlight is turning to pension schemes. This presents reputational risk for companies whose schemes are failing to effectively take account of ESG factors. Schemes that lag the market and/or peers may lead to reputational damage for the company, particularly where the company has strong ESG policies and goals.
  • Regulations:
    ESG rules, guidance and disclosures for pension schemes are only going in one direction. You need to stay ahead of these changes and take a proactive approach. Companies have a fiduciary duty to their members to ensure their scheme reflects the company’s ESG policies and goals.

Review your pension provider’s ESG policies and investments 

Most trust-based pension schemes are playing catch-up with constantly evolving ESG regulations and best practice. Companies with group personal pensions (GPPs), group self-invested personal pensions (GSIPPs), group stakeholder pensions (GSHP) or master trusts should regularly review that their providers’ ESG policies and investments reflect their corporate ESG policies and goals.

DC MOT data shows that 51% of companies haven’t reviewed their DC pension provider in the past two years. In a fast-changing environment, your provider’s policies and investments may not reflect your latest views on ESG. You should also ask searching questions to make sure your provider’s actions match its words. 

Lack of action on ESG creates potential reputational risk. You should also beware of saying one thing and doing another. Regulators are increasingly clamping down on “greenwashing” by investment managers and other financial groups with some big names in the headlines.

At the same time, company pension schemes are coming under more scrutiny from campaigners. As these two trends come together, the risk of reputational damage from pension schemes that don’t live up to corporate ESG policies and goals will increase.

Here are some points to consider:

  • Many companies have public net zero climate commitments that only cover scope 1 and scope 2 emissions: operations not directly carried out by the business such as the pension scheme aren’t included. However, carbon emissions financed by pension schemes can be many times higher than a company’s own disclosed emissions (scope 1 and 2 only).
  • Mercer’s Responsible Investment Total Evaluation (RITE) research shows that less than half of DC pension schemes include an “ESG aware” fund in their default investment strategy — resulting in the vast majority of DC members having no exposure to these funds.
  • DC scheme members increasingly believe in the importance of ESG issues and sustainable investment. This presents an opportunity to increase member engagement and get your people involved with planning for the future.
  • ESG considerations are increasingly important to consumers and employees — especially young people and graduates but across the board. Sustainability will help you attract the next generation of talented employees.

Working towards ESG alignment 

ESG factors require explicit consideration and are only going to increase in importance. Regulation will keep getting tougher and expanding its reach, and ESG factors will continue to affect risk, returns and expectations/reputation. Pension schemes will inevitably come under more scrutiny as campaigners and other stakeholders hold companies to account for their ESG actions, or lack thereof.

If you want to make sure that your DC scheme is aligned with your corporate ESG principles and goals, Mercer’s Sustainable Investment Pathway breaks the ESG journey down into four key stages:

  • Beliefs

    • Are ESG and climate change investment beliefs established?
  • Policy

    • Are ESG and climate change polices and governance in place?
  • Process

    • Are processes aligned to a strategy? How are internal and/or external managers guided to follow ESG policy and process?
    • Are reporting and monitoring structures in place to ensure practices align with policy?
  • Portfolio

    • Are climate change and ESG risks and opportunities integrated through the portfolio?
    • Is a clear approach to voting and engagement in place?
    • Should sustainability-themed ESG and climate change solutions be a part of investment strategy?
    • Is a robust and defensible screening framework in place? Is it monitored?
For many employers the first step will be to see how their scheme compares with best practice and the wider market. Mercer’s DC MOT is a quick way to get a picture of where you stand and how to improve. We’re here to help.
Related solutions
Related insights