We have recently begun asking our customers questions about what they want their pensions invested in. Earlier this month, we surveyed close to 2,000 customers in our Tailored Plan about their views on sustainability in the context of profitability. As a company that wishes to leave the pension industry in a better place than where we found it, investing sustainably is aligned with our purpose. At the same time, our vision is to live in a world where people can look forward to a happy retirement and that means helping our customers build up a sizable pension pot.
As we evaluate and consider your responses over the coming weeks and months, we wanted to explain why we believe the desire for a pension that reflects your support for sustainable corporate behaviour is also well-aligned with our ambition to help you grow your pension pot.
Academic studies have found that more sustainable investing can lead to higher returns
The Harvard Business Review recently wrote that many “still equate sustainable investing with its predecessor, socially responsible investing (SRI), and believe that adhering to its principles entails sacrificing some financial return in order to make the world a better place. That view is outdated.”
One study found that companies that developed organisational processes to measure, manage, and communicate performance on sustainability issues in the early 1990s outperformed similar peers over the next 18 years. A different study demonstrated the positive relationship between high performance on relevant sustainability issues and superior financial performance.
Evidence from Nordea Equity Research found that from 2012 to 2015, the companies with the highest sustainability ratings outperformed the lowest-rated firms by as much as 40%. Bank of America Merrill Lynch found that firms with a better sustainability record than their peers produced higher three-year returns, were more likely to become high-quality stocks, were less likely to have large price declines, and were less likely to go bankrupt.
Future trends may speed up the economic risks of irresponsible corporate behaviour
Beyond the academic studies, there are some very acute and apparently increasing risks to investing in companies that are seen as unsustainable, which can damage their share prices and negatively impact pensions owning them.
Government action: Governments are getting tougher on irresponsible corporate behaviour. For example, many European countries, including Belgium, Ireland, Italy and Spain have made certain investments in banned weapons (such as nuclear weapons, chemical weapons and anti-personnel mines) illegal. At the same time, regulations on tobacco companies are getting stronger as public demand for more smoke-free areas grows. Most recently the European Union has been threatening a carbon tax that would impact large fossil fuel producers. Government bans, regulations and taxes can all negatively impact the share prices of affected companies and reduce pension returns.
Civil society activity: In addition to governments, society has been increasing the pressure on issues of sustainability. The tobacco industry has been mired in expensive lawsuits, including against electronic cigarette owners. Fossil fuel producers also seem destined for pricey courtroom battles, with companies like Exxon facing growing legal costs that can negatively impact their profitability.
Media and reputation: No doubt government and civil society, combined with adverse press activity can lead to reduced business opportunities and reduced revenues. In the 1990s Nike was brought to its knees when its valuable brand became synonymous with child labour exploitation, resulting in reduced sales and a fall in its share price.
Demand for sustainable investing
At the same time, sustainable funds have seen record inflows of over £15 billion in 2019, roughly four times the previous record of 2018, as they become more mainstream. And while sustainable investing still remains small, some large shifts of capital indicate leaving things too late could be detrimental to one’s pension. Large pension funds around the world have started divesting from tobacco, reducing the share prices of the large producers.
A similar rush for the door can be seen in controversial weapons and thermal coal. The outgoing governor of the Bank of England, Mark Carney, has warned that fossil fuel companies could become “stranded assets” - meaning nobody wishes to own them. In 2008, the concept of a stranded asset was better known as a “toxic asset” and, as the name implies, pension investments would do well to avoid these.
All of the above suggests that sustainable investing can be very beneficial for the long-term returns of a pension, which, along with our customers’ moral views, is why we are exploring changes to our investment offering. We want to make sure we are providing you the best possible range of investments to choose from and we remain very grateful for your views. Please do continue to engage with us via firstname.lastname@example.org as we plan our next steps to help our customers look forward to a happy retirement.