Environmental, social and governance (ESG) considerations remain a top priority for defined contribution (DC) savers, despite the rising cost of living, research from Legal and General Investment Management (LGIM) has suggested.

The survey of over 4,000 UK members found that while nine in 10 pension savers have felt financially squeezed this year as a result of higher prices, this has not had a negative effect on member demand for investing in ESG through their pension.

Instead, nearly two thirds (65 per cent) of savers said that inflation had made them think harder about the need to invest in renewable energy and sustainable food production, in order to increase the UK’s long-term economic resilience.

Savers also seemed willing to take action to support this, as a "clear majority" of the members surveyed said they would be willing to pay higher fees to invest in private market assets that can help deliver better ESG outcomes.

In particular, the survey found that 72 per cent of respondents would pay higher fees for exposure to renewable energy infrastructure led members’ list of priorities here, while 69 per cent would be willing to pay higher fees for social investments, such as investing to build affordable homes (69 per cent) and creating local jobs (69 per cent).

However, LGIM found that member appetite for illiquid assets was tempered by the need for private markets to demonstrate robust performance, as less than a quarter (22 per cent) of those in Generation Z said they would be willing to pay more to invest in illiquid assets irrespective of performance, falling to 7 per cent among Baby Boomers.

The research also found that whilst engagement over divestment remains the preference among members, this is only up to a certain point.

According to the research, more than half (55 per cent) of members said they want to see their pension provider engaging with companies on improving their environmental practices and only divesting from them if this doesn’t work, compared with 33 per cent who would prefer to avoid companies with a poor environmental record altogether.

However, members were less forgiving of companies which aren’t performing well in terms of their social practices, such as their record on modern slavery.

The survey found that less than half (45 per cent) thought their pension provider should keep investing with them to effect change and only divest if they don’t improve, while a "sizeable" 43 per cent wouldn’t want their provider engaging with companies with a poor social record at all.

The focus on ESG considerations seems set to grow further, as LGIM argued that with more Gen Z members entering the workforce and becoming auto-enrolled every year, pension scheme trustees, employers and providers are increasingly going to have to reflect on their attitude and desired approach to ESG investing.

Indeed, the research found that while, on average, 80 per cent of members across all generations said they worried a great deal or a fair amount about climate change and global warming, Gen Z members were the least tolerant of the continued use of fossil fuel use, as a "resounding" 93 per cent wanted to see their pension reduce its exposure to investments in fossil fuels.

In addition to this, when asked how well they thought pension funds that had net-zero targets might do in the long-term, nearly three quarters (72 per cent) of Gen Z members thought they’d do better than funds without a target.

This was "significantly higher" than the figure across all generational groups, where 55 per cent thought these funds would outperform.

Furthermore, when asked whether leadership on ESG issues would factor into their decision as to whether or not to consolidate their pensions with a particular pensions provider, more than eight in 10 (83 per cent) of Gen Z members said it would, compared with an average across all generations of 75 per cent.

LGIM head of defined contribution (DC), Rita Butler-Jones, stated: “Despite the financial pressures and systemic challenges we are currently seeing around the world, it’s clear that ESG remains central to many members’ attitudes about how they want their pension to be invested.

“A high proportion of members are open to greater allocations to ESG private market assets such as renewable energy and affordable housing sends a clear message to the pensions industry.

"The onus is on us to demonstrate where we believe illiquid assets can play a meaningful role in aiming to deliver better overall member outcomes – and in the process, unlock the potential power of DC capital to invest in the UK and beyond.

“The attitudes of the Gen Z members we spoke to are particularly notable. They may be the pensioners of tomorrow, but they want us to take action today to ensure that they have a brighter future to look forward to.

"Trustees, employers and providers need to pay close attention and ensure that the voices of those now entering the workforce are being heard.”

Share Story: