Alexander Forbes celebrates Earth Day by showing how responsible investing creates sustainable liabilities

Responsible investing is an approach which incorporates environmental, social and governance ("ESG”) factors into investment decision-making. "So, for example, this could mean evaluating a company’s environmental controls, realising that there is a significant risk of an expensive disaster and choosing not to invest in the company,” says Underwood.

Underwood highlights that there is reasonable evidence that evaluating companies from a more holistic perspective does add financial value. She continues, "Even beyond this, the impact companies have on wider society should matter.”

"One of the adjustments that pension funds have had to make is realising that having the maximum fund credit in your pension fund isn’t the point; buying the highest income in retirement is. And the cost of that income in retirement doesn’t necessarily go up and down for the same reasons your investments do,” says Underwood.

She explains that this is called an asset-liability mismatch. Your assets are the investments in your pension fund. Your liability is the income you want to buy for your retirement. Your objective is to minimize the gap between these two; if your liability goes up, and your assets don’t go up with it, you’re in trouble. So, managing risk becomes about keeping the gap between these two as small as possible. And maximising returns by increasing this risk doesn’t make sense.

"And ultimately it’s about the lifestyle your income can buy. It’s about your standard of living, your quality of life in retirement. If air quality deteriorates, you have to spend more on healthcare. If inequality falls, reducing crime, this reduces how amount you have to spend on security. According to the World Economic Forum, income and quality of life are already moving in opposite directions: In a number of countries, environmental degradation is significantly diminishing the health of citizens and the quality of life even as incomes rise,” continues Underwood.

Your assets are still your investments. But your liability is your quality of life in retirement. It doesn’t make sense to maximise your investment returns, if this deteriorates your quality of life.

"We want the quality of life we expect in retirement to be better, not worse, than our current quality of life. If our investments make that quality of life worse, that’s not sustainable. It doesn’t make any sense,” concludes Underwood.