Read on if:
- You a member of a pension scheme.
- You have already heard of Environmental Social Governance (ESG) or especially if you haven’t.
- You would like to know more about ESG in layman’s terms.
Why is it here?
Back in October 2019 something happened (imagine the documentary maker Adam Curtis saying this) that most people (unless you are a trustee of a pension scheme, work in the industry or are a pension geek) will not be aware of but it started to bring the acronym “ESG” into the mainstream. The Pensions Regulator (TPR) incorporated new regulations to trust-based pension schemes which included the need to consider:
- financially material considerations including environmental, social and governance matters such as climate change
- stewardship of investments, such as exercising rights (including voting rights) and engaging with activities in respect to the investments
- the extent to which members’ views, including ethical, social and environmental, are considered when planning investments
This now means that these huge pension funds with billions if not trillions of pounds in them have to discuss ESG investing, climate change and make information available on their website.
David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at TPR, said: “Good governance and the management of investment risk in pension schemes is fundamental to provide savers with a good retirement.
“Climate change is a core financial risk which trustees will need to consider when setting out their investment strategy. They will be obliged to show how they are taking this and other financially material considerations into account over the lifespan of investments.
This means that the big guns (not real guns as this would not be very ESG) are talking about it, so it will start to trickle down into mainstream workplace pensions, which is a positive step forward for the planet as there needs to be one around to enable the youth of today to retire.
What is it?
Is it ethical investing? Well no…. well yes… actually a bit of both but in truth it’s much bigger than that just ethical investing alone.
The simple line I would draw to show the difference between Ethical investing and ESG investing is as follows:
Ethical – Invest for a clear conscience / avoid bad things
ESG – Participate in change
Fund managers (acting on behalf of investors) are deciding which companies to invest in and will search companies based on their ESG characteristics. They are looking for companies who want to use their business as a force for good, who have started their sustainability journey and are continually looking for ways to improve. Each manager’s ESG characteristics criteria will differ but in summary they will consider some of the below:
This concerns interaction with the physical environment, such as climate change, biodiversity, natural resources, carbon emissions, air and water pollution and much more.
This looks at the impact on society and communities, including human rights, health and safety issues, labour standards, diversity and inclusion product liability, privacy and data security.
This focuses on how companies are governed, including diversity, transparency, ownership, board independence, ethics, executive compensation and so on.
So, is ESG Ethical investing?
Well partly yes, as all of the above are generally seen as ethical but ESG is not only avoiding investing in companies it is aiming to drive change influencing boards using their voting rights and the threat of not investing unless they do something about it. Yes, guess what, money talks!
See below an 8 minute video which explains much better than I can (the full version is 42 minutes) “How can the finance sector help save the planet?” The sector’s leading voices explore the crucial role of finance in turning the tide on climate change and nature loss in this short film “Our Planet: Too Big To Fail”:
How does it affect me?
The question to ask is, what are the pension providers doing about where your money is invested?
Following the 2008 financial crisis a large proportion of bankrupt business’s had low ESG scoring when looking back at their ESG characteristics. So for long-term investing this would not be good for your pension. With that in mind, along with some of the aforementioned reasons above, they are drip feeding ESG components into their default funds, which if you have been auto-enrolled into a workplace pension through one of the mainstream master trust or contact-based pension providers then that is where likely where your money will be invested unless you have made an active choice or received financial advice. So you will likely be affected by ESG by default – but a good default.
Here is a snapshot of what some of the main providers are doing:
In late 2020 they announced their divestment of £440 million from companies that have failed to meet Scottish Widows ESG standards.
New exclusions introduced include:
- Companies which derive more than 10% of their revenue from thermal coal and tar sands;
- Manufacturers of controversial weapons;
- Violators of the UN Global Compact.
Their exclusions policy applies across all active and passive pension – including the flagship workplace default fund.
Scottish Widows Master Trust has also expanded the fund range with new ESG and sustainable options to allow members an opportunity to align their personal beliefs and preferences with their investment choices
Their two main default funds (“My Future” and “My Future Focus”) over the last year now provide greater diversification by adding ESG components to the funds. Aviva have strong ESG credentials and have ambitious plans to deliver a wider range of climate-friendly funds, giving pension scheme members more choice in this space.
Aviva believes that by choosing a pension scheme that has a strong ESG investment strategy as a default, or giving pension scheme members the option to invest their pension contributions into ESG or ethical funds, it can help put pressure on companies to continually improve their position. And taking steps to make the world a better place to live is good for all of us and future generations.
Nest has adopted a new investment policy with the aim of being ‘net zero’ in terms of carbon emissions by 2050.
The UK’s largest master trust provider says this policy should help address longer-term climate change issues, as well as supporting a ‘green recovery’ from the economic problems caused by the Covid pandemic.
To help achieve this Nest is making a series of immediate commitments. These include moving £5.5bn of shares into climate aware strategies. This represents 45% of Nest’s entire portfolio. Nest says this will reduce its carbon footprint, and is the equivalent to taking 200,000 cars off the road!
Other pension providers are available and are making similar steps in this direction. Note that not all savers in the above companies are invested in the default funds which are being overhauled to add ESG, especially those that have had their plan for a while and are therefore in an older product – if in doubt, ask.
There are also organisations that are championing this message such as:
Make My Money Matter https://makemymoneymatter.co.uk/
Co-founder Richard Curtis the film writer, director and vice-chair of Comic Relief, are people-powered campaign fighting for a world where we all know where our pension money goes, and where we can demand it’s invested to build a better future. My favourite quote from their website is:
“If you have a pension, you have power. So much power that moving to a more sustainable fund can have many times more impact in reducing your carbon footprint than giving up flying and becoming a vegan combined.”
It gets the point across that you have more power than you think.
Share Action https://shareaction.org/
Whose vision is a world where ordinary savers and institutional investors work together to ensure our communities and environment are safe and sustainable for all.
There are now steps been taken to try to influence positive change by using pension fund investment, either with you having the ability to make an active choice or by default. We can all do our bit by separating our recycling, using less plastic, turning the lights off and travelling less but real change happens from the top down.
The way I see it is, investing in companies who consider the environment, look after people and have a good business plan would be a no-brainer for a long-term investment in something like… a pension.