25 August 2021

Henry Tapper, chief executive officer at AgeWage, discusses ESG, climate disclosures, and the greenium

Today, many of the decisions taken in the staging of automatic enrolment are being questioned. Occupational defined contribution pension schemes are being asked by government to assess their value to members, yet many employers participating in master trusts are concerned they know little about where the money that they send from payroll each period is going. There are several drivers for this to change:

Employers want to maximise the value of their spend on workplace pensions.

Trustees need to show they are maximising value for members.

Government wants to see pension schemes investing patient capital into the real economy.

All stakeholders want to improve the environment, society and governance (ESG).

It is quite easy to calculate the cost of running a pension scheme and to measure the outcomes of saving in one scheme over another. But measuring the environmental, social and good governance of a pension pot is not so easy. In fact, it is proving very hard.

The challenge to measure and compare ESG has been a pre-occupation of ratings agencies with organisations such as MSCI and Morningstar now providing ESG ratings. But unfortunately, they do not always provide consistent and authoritative results. A company like Tesla can be both an angel and demon depending on what lens you use to rate it. Making informed choices on subjective ratings is problematic for individuals and employers

Another problem when choosing a pension fund is the unfounded claim of many pension schemes that they will be carbon neutral at any date from 2021 to 2025. These claims are often based on no more than wishful thinking. There is rarely detail on the strategies for meeting these targets and what they will cost.

Reducing an investment’s carbon footprint is not a painless process, it costs money. It requires research, stewardship and it may involve buying and selling assets. This exchange of assets may result in a reduction in the investment return of the fund as will the research and stewardship costs which are borne by investors. And this is before the fund managers take their cut for the ‘value added’. Taken together, these additional costs are known as the ‘greenium’ (https://bit.ly/2U1DH3a).

You would only pay a greenium if you were being rewarded for it; and the value for this extra money paid and return sacrificed needs to be justified either in terms of the good done or the extra return attracted. Those entrusted with managing our pensions are not entitled to invest our money unless they consider it economically advantageous to us – ‘doing good’ is not enough.

So, how can we tell if a decision to invest in ESG justifies the greenium? In 2016, I decided to split my pension investment pot into two, investing one half into a fund which simply tracked a market index, and the other half I invested in a fund which explicitly charged me twice as much but promised to invest for better ESG. I have been able to track the progress of each half of my pot. For some time, the ESG enhanced fund lagged my tracker but right now the ESG fund is about 2% up. I have earned about three times the extra I paid in fees (my greenium) compared to the market tracker. It’s hard for me to work out whether all this extra value came from ESG but I’d like to think that I’ve had value for my greenium and this simple financial experiment can form the basis of retrospective analysis of the quality of my ESG value for money.

Unfortunately, past performance isn’t the best way to choose a fund for the future. We need to find a way to discover which of our investments are delivering a positive ESG outcome and which are standing still or worse – delivering fake news. Right now, many pension schemes are enticing us to invest with promises of future carbon neutrality. These promises are easy to make and hard to keep. Now is the time to measure the greenium committed to meeting these promises and to start the much harder task of measuring payback, both in terms of improved ESG and in fund returns.

Thankfully, we have a means of measuring the carbon footprint of a pension fund in financial terms through the disclosure of climate-related risks and opportunities standardised by a globally accepted task force (the Task Force on Climate-Related Financial Disclosures (TCFD)). With reliable climate-related financial information, financial markets can price climate-related risks and opportunities correctly and can manage the rocky transition to a low-carbon economy.

We urgently need to use the data available from the disclosures to measure the progress our funds are making and understand whether we can invest both for good and for profit. We will only achieve this by using commonly available information, which is why TCFD is our best way of ensuring our greenium is worth it. 


Featured in the September 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.