Investors choosing an ESG fund for a pension face precisely the same risks as any other investor in ESG, according to Maria Nazarova-Doyle, head of pension investing at Scottish Widows.
She says companies are already being affected by ESG-related issues, as companies prepare to meet future targets around climate or other issues now, even if the actual date to meet the target is far into the future.
She says in order to avoid the pitfalls, “one of the things you should do as an adviser, if you can, is to see where the sustainable investment function sits within the asset management firm: is it just part of the marketing team?”
Louie French, sustainable portfolio manager at Tilney says one of the major considerations should be how much resource a firm is putting into its ESG team: "Are the funds growing in size? Are new products being launched for that team? Those are signs of how seriously the firm takes ESG.”
Nazarova-Doyle adds that clients should be wary of conflicts of interest between the pension provider and the asset manager, for example if the pension provider is a company that also owns an asset management business, as this might mean the pension provider is obligated to use the funds of the in-house asset manager, and this may not be the best solution for the client.
Andrew Barr, wealth planner at Succession says: “For many of us, our pension will be among our largest investments.
"Yet, when it comes to ESG, we do not see any fundamental differences in client expectation as a result of the overall investment wrapper. Perhaps the only measurable difference is in timeframes, which will vary from accumulation to income funds.
“As savers, it can be difficult to evaluate all the potential risks associated with ESG investing, but there are a few simple ways that can help mitigate some obvious ones.
"Firstly, get underneath the bonnet of your portfolio and assess your allocations. It is key to question the mission behind how your capital is deployed in the fund you are invested in and check if the fund managers are actively taking steps to invest in companies that are prioritising sustainable practices.
"Secondly, keep abreast of how the ESG analysis is being conducted by the managers of the fund. Does the management team meet with the companies to assess sustainability qualitatively and quantitatively? Is the impact being measured by the company or the fund managers? If so, how?
James Faulkner, who runs an ESG-focused EIS portfolio at Vala Capital says a notable feature of the past year has been that early stage companies which have some ESG functionality have performed better than other early stage companies.
This may be a sign that ESG-compliant companies will be among the winners from any changes to the wider economy in the world after the pandemic.