ESG InvestingFeb 18 2021

Assessing the ESG risks for a pension client

Supported by
Scottish Widows
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Supported by
Scottish Widows
Assessing the ESG risks for a pension client
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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.” 

When it comes to ESG, we do not see any fundamental differences in client expectation as a result of the overall investment wrapper Andrew Barr, Succession

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. 

Listed equity markets have displayed the same characteristic for most of the period since March 2020, with ESG funds generally beating non-ESG equity funds in that period. 

If the changes that have occurred as a result of the pandemic were to become permanent, this would affect the returns of non-ESG portfolios. 

French adds that another way to understand if the firm is truly committed to ESG principles is to discover if they have signed up to the UN Sustainable Development Goals, as a basic and initial indicator of a product provider’s intentions. 

Minesh Patel, an adviser at EA Financial Solutions in London says the key may be to look at the actual underlying holdings in a portfolio that purports to be ESG, rather than just select a portfolio which has the words ESG in the title.

He adds that he prefers to look at firms which have an established track record in the area of ESG investing to those which are relative newcomers to the market. 

Meg Brown, executive director for marketing and business development at ESG specialist investment firm, Impax, says the firms that are doing ESG properly are those also able to explain and demonstrate this when they come to report to clients about the holdings in the fund.  

She says: “Funds which invest in environmental technologies or claim to have a net zero carbon impact should be able to clearly demonstrate it through their portfolio holdings and impact reporting.

"We started reporting quantified impact metrics seven years ago. Judging from the positive feedback we have received, clients are finding it helpful to understand the link between our investments in companies delivering environmental products and services and the environmental outcome of their business activities.”

Brown adds: “Delivering meaningful impact reporting is a complex process that requires specialist expertise to collect the data, then scrutinise it and understand it.

"The key to reporting impact metrics is to present the data in a way that is meaningful and accessible to investors but, most importantly, directly aligns with their principles.

"Impact investors want to make a difference and they will have ideas unique to their own experiences about where their money should go and what they want it to achieve, in terms of real, tangible change.

"If a client is concerned about the climate crisis and wants to ensure that their investment is working towards zero carbon emission goals, then a meaningful metric would need to show how their money has directly helped to avoid carbon emissions versus the current baseline economy.”