Pension Funds Should Also Engage on ESG

How can pension funds improve their governance practices on ESG?

Pension funds' role in sustainable investing is paramount, as all the actions undertaken by investors to improve the ESG performance of a company are ultimately carried out for their benefit.

Emmeline Cooper and Harald Walkate argue in their article « Now we're talking: why pension funds should engage with their members on ESG investing » that the best way for pension funds to understand and provide clarity for their clients is to set up deliberative democratic initiatives:

• Pension funds need to know what values to put forward for their clients, but also what consequences doing so would have on their investment strategy and on all their stakeholders.
• Regular surveys pension fund usually use are limited as they are biased, suffer from low response rate and lack generalisability.
• Pension funds lack expertise in carrying out surveys, while survey providers often lack financial knowledge, making them both unable to make the most of this tool.
• Pension fund clients suffer from low financial and extra-financial literacy, which suggests they would not be able to understand the necessary trade-off consented in ESG policies.
• Participants are not given the opportunity to share their ideas with others, forcing them to think independently without proposing comprehensive policies.
• The authors believe a democratic assembly composed of randomly selected beneficiaries from the fund can help engage retail customers on complex topics directly involving them.

The democratic system proposed in the article would involve pension funds' beneficiaries in a manageable way over a few days or weeks, requiring an involvement level between the quick survey and the permanently elected representatives.

Of course, there are obstacles to this system, beginning with the complexity of the targeted topics and the still low financial literacy that would require dedicated facilitation, and the difficulty in setting up committees that are representative of the whole pool of beneficiaries.