Principles for Responsible Investment Releases Guidance for Asset Owners on Incorporating ESG Preferences of Beneficiaries

LONDON - Today, the Principles for Responsible Investment (PRI) releases new research on why and how asset owners can incorporate beneficiary preferences on environmental, social and corporate governance (ESG) issues in investment decision-making. The PRI’s new guide first explains why beneficiary preferences on ESG issues should form a fundamental component of any asset owner’s investment strategy, policy, and strategic asset allocation.

Although asset owners have historically interpreted beneficiaries’ interests as solely focused on financial returns, new research from the PRI shows that many beneficiaries have preferences related to the sustainability performance of their investments. Coupled with an evolving regulatory landscape and a growing acknowledgement that investments should seek to reflect the values of their beneficiaries, an increasing number of asset owners are engaging with beneficiaries to understand and implement their preferences on ESG issues to remain competitive and improve beneficiary satisfaction.

PRI’s new guide is meant to help asset owners meet the modern needs of their beneficiaries and capture many of the benefits from a more engaged beneficiary base. Asset owners reported that their efforts result in a competitive advantage in markets where beneficiaries can choose between asset owners. It can lead to increased contribution levels as beneficiaries become more engaged with the saving process, as well as an opportunity to educate beneficiaries.

“Although asset owners in most jurisdictions are not legally required to incorporate the preferences of beneficiaries into their decision-making, many do, as factoring in beneficiary views is both important and necessary. All pension funds should have an understanding of their beneficiaries’ views on how they want their money to be managed”, said Principles for Responsible Investment (PRI) CEO Fiona Reynolds. “All asset owners have a real opportunity to improve the satisfaction and engagement of their beneficiaries by aligning investment practices with beneficiary preferences, thereby cultivating valuable dialogue and loyalty. In addition to ensuring that beneficiaries have income in retirement, asset owners also need to be thinking about the world they want to retire into – and that is one that has a more sustainable financial system.”

In the new guide, PRI outlines a four-step process for asset owners to understand and integrate beneficiary preferences:

1. Define Engagement Objectives: Asset owners should understand what information they are seeking to obtain and communicate, and what investment practices they are prepared to change in response to beneficiary feedback.

2. Engage Beneficiaries: Asset owners should combine various methods to seek beneficiaries’ preferences including surveys, focus groups, interviews, beneficiary representation on trustee boards, research and data analysis, and understanding beneficiary campaigns. PRI also recommends strategies to overcome common challenges, such as knowledge gaps, low beneficiary engagement, and limited capacity.

3. Put Preferences into Practice: Asset owners can reflect beneficiary preferences in investment strategies in several ways, such as making changes to capital allocations, dedicating further resources to company and policy engagement on priority issues, and shaping sustainability outcomes. Asset owners should also communicate the key priorities identified from beneficiary engagement to their service providers and embed consideration of beneficiary preferences into the asset manager selection, appointment and monitoring processes.

4. Report Back to Beneficiaries: Beneficiaries need clear and transparent communication about how their money is invested and the outcomes of their investments. Communicating with beneficiaries about the results of an engagement will increase beneficiaries’ sense of ownership over their savings while maintaining that the asset owner is updated on changing trends and preferences.

To inform the new guide, PRI surveyed 14 signatories, including Marion Maloney of Environment Agency Pension Fund, Xander den Uyl of ABP, and Xinting Jia of CareSuper about their efforts to better understand and align with their beneficiaries’ values.

Other supporting comments include:

Marion Maloney, Head of Responsible Investment and Governance, Environment Agency Pension Fund commented: “Our members told us clearly – they want ambition and urgency in how the Environment Agency Pension Fund invests and for us to be maximising the positive impact that we can have. 92% of members who took part in one engagement event wanted the Fund to have a net zero target. After members told us this, we spent 9 months analysing environmental, financial and legal data. And we are delighted to have just launched an ambitious plan to get to net zero by 2045.”

Xander den Uyl, ABP Trustee and PRI board member said: “We welcome the growing interest of beneficiaries in how their money is invested, looking critically at climate, human rights and other outcomes. For ABP, it is our aim and our duty to have a constructive dialogue with our beneficiaries on these issues so we can incorporate their preferences in our responsible investment policy.”

Nicole Bradford, ‎ Global Head of Responsible Investment at Cbus commented: “We welcome this report and encourage the conversation around beneficiary preferences to continue across investment managers and Funds. Cbus has benefitted from undertaking specific research with Fund members on their understanding of responsible investment and what matters to them. The engagement strongly reinforced that we are focussed on the ESG issues that are material to our beneficiaries and their investment returns. It also provided insights about how we can better engage members, increase their understanding of the Fund’s decision making and, consequently, deepen the trust they place in us to look after their retirement savings.”

Read the full briefing here.