Climate change, social inequality and the transition to a low-carbon economy are among the most pressing challenges of our time. These issues are not abstract concerns for future generations — they are reshaping the world we live in today. And for employees, one of the levers they have to make a positive impact, while also building a more secure financial future, is their pension.

Recent Scottish Widows’ research reveals that 72 per cent of employees now expect their employers to offer a responsibly invested pension, showing there is a clear opportunity for employers to align their pension offer with the desires of their employees.

The case for responsibly invested pensions

Responsibly invested pensions are important for reflecting savers’ priorities and building a more sustainable world, and are a critical response to the interconnected risks and opportunities posed by environmental, social and governance factors to help build more resilient pension pots in the long term.

“Responsible investment” can mean different things to different people. For some, it is about excluding companies that harm the planet or society, such as those involved in coal production or human rights violations. For others, it is about actively investing in businesses driving positive change, including renewable energy projects or companies with strong diversity and inclusion practices. It can also mean investors use their voice to influence business transitions through advocacy, engagement and voting.

Our research shows that employees have diverse concerns. The cost of living crisis was highlighted by those surveyed as the biggest issue impacting society. This was closely followed by climate change and other environmental and social concerns.

It was interesting to see that younger workers place greater emphasis on social issues such as human rights, fair pay, and diversity, equity and inclusion compared with older generations. The variation in priorities underscores the need for pension options that cater to a range of values and preferences, and for a stewardship approach that helps tackle some of these issues through engagement with companies and the wider industry.

Aligning good returns with sustainable investments

For employers, offering responsibly invested pensions is not just about meeting employee expectations — it is about future-proofing retirement savings.

Our report found that 63 per cent of employees see long-term value growth, followed by financial risk management (41 per cent) as the primary objectives for their pension investments.

Some may have the perception that a responsibly invested pension may require giving up returns compared with traditional funds. However, integrating ESG factors into investment strategies is about understanding and managing risks and opportunities that may impact the financial value of a company. This can help enhance long-term value growth and strengthen financial risk management in line with savers’ priorities — while also contributing to a more sustainable future.

Companies that proactively manage their environmental impact, such as reducing carbon emissions or improving energy efficiency, can often be better positioned to navigate regulatory changes and market shifts. Those that look after their employees and manage human rights risks in their supply chain can benefit from positive employee engagement and retention rates, and reduce reputational risks.

Role of employers in driving change

Employers have a unique opportunity to bridge the gap between employee demand for responsibly invested pensions and the action needed to make them a reality. But to meet this demand, employers must actively engage employees with their pensions.

Nearly half (47 per cent) of employees are unsure whether their pension is invested responsibly, while a quarter (25 per cent) cite a lack of information about their pension as a barrier. This knowledge gap highlights the importance of transparency and education in helping employees make informed decisions.

By providing clear, accessible information about the ESG considerations in their pension options, employers can empower employees to make informed decisions. This includes explaining the benefits of responsible investment, how they can enhance long-term returns, and how to switch to sustainable funds if desired.

Another important step is to integrate responsible investing into the default pension option. While 69 per cent of employers offer responsibly invested pensions, just 44 per cent make it the default. Given that 61 per cent of employees would not know how to switch funds, making sustainable funds the default would ensure savers are growing their pension pots in a more responsible way as standard.

Finally, employers should collaborate with pension providers and financial advisers to stay ahead of emerging trends and regulatory changes. This ensures their offerings remain aligned with employee expectations and industry best practices, particularly for smaller companies that may lack internal resources. By taking these steps, employers can drive meaningful change and align employee savings with a sustainable future.

Collective responsibility

As we look to the future, the pensions industry has an opportunity to educate savers on responsible investing, engage with employers and advisers, and enhance their pension offering to meet the expectation for responsibly invested pensions from nearly three-quarters of employees. Climate change, social inequality and other ESG issues are impacting the world we live in, and employees are increasingly demanding that their savings reflect their values.

For employers, this means offering responsibly invested pensions and advocating for clearer standards and greater transparency across the industry. By doing so, they can help build a more resilient, long-term financial system that rewards sustainable practices and aligns capital with the needs of people and the planet.

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