How can advisers become informed about ESG investing on their clients' pension?

French says the popularity of the TV naturalist David Attenborough’s programmes about the environment and climate, have created a new base of customers for ESG products, as an older demographic, much closer to retirement have started to focus on sustainable funds.

French says the biggest challenge this has created for fund buyers such as himself, as those in or close to retirement have more of a focus on generating income from portfolios, which he says is more difficult to achieve with ESG eligible investments.

Most of those are in sectors, such as renewable energy, which are very fast growing, but may not be generating sufficient cash at this time to pay a dividend as well as fund the future growth of the business.

A major event for ESG-conscious advisers will be the government’s guidance on how it will apply legislation around ESG funds which has been drawn up by the EU, and is being introduced in that jurisdiction in March 2021.

As the UK has exited the EU, the UK government is not bound by those rules, but has indicated it will introduce legislation to “match the ambition” of the EU in these areas.  

The legislation is called the EU Sustainable Finance Disclosure, and requires investment product providers to regularly disclose the impact of the companies invested in.  

If a client who is a year from retirement comes to the adviser and says they want to put their entire portfolio into wind farms, that might not be the right thing Tom Taylor, Aviva

Tom Taylor, of  the Sustainable Finance Centre for Excellence at Aviva says: “Depending on how this is applied in the UK, if it is anything like the level and frequency of disclosure that the EU will require, then there will almost be too much data, and it comes down to how the adviser filters it.”

French says pension providers are a little behind the wider industry when it comes to ESG disclosure, but that the regulatory change outlined above may mean they catch-up. 

Taylor adds that one challenge advisers might face with clients, particularly those approaching retirement, is “the conversation” to ensure the client's risk profile as they approach retirement is aligned with the realities of ESG.

He says: “If a client who is a year from retirement comes to the adviser and says they want to put their entire portfolio into wind farms, well that might not be the right thing for the client given the time horizon, even though it's ESG compliant."

Taylor says a combination of regulatory changes means it is important a conversation is had, but in the long-term, having the conversation is better both for the client and the adviser, it makes the relationship work better for everyone. 

French says one particular challenge for advisers at a time of general pressure on fees is that ESG investing is much more commonly achieved using active funds, whereas pension providers have been increasingly keen to use passive funds in order to keep costs lower, but this is much more difficult in a pension fund, and may mean two of the priorities of many clients, ESG and low fees, collide.

He says many pension schemes now have fee caps on them, meaning that products which charge a fee that is higher than the cap cannot be invested in. 

Heather Christie, who heads up the MyMaps fund range at BlackRock, says passive instruments are becoming an increasingly important part of the ESG landscape, with advisers able to align the clients needs to those of the range of products on the market by selecting a portfolio that does exactly what the client wants.

Cathrine De Coninck-Lopez, global head of ESG at Invesco says: "The rules that have been introduced around UK pension scheme trustees having to consider ESG and climate risks are meaningful for UK pension savers.

"This requirement means that trustees and their advisers have tougher criteria for reviewing ESG and stewardship policies and the risks of greenwashing are reduced.

"Due diligence can take many forms including specific examples, considerations of investment process, and reporting of ESG criteria alongside financial criteria.“

Maria Navaroza-Doyle, head of pension investments at Scottish Widows says many older clients now realise the dangers posed by climate change will impact their own quality of life, and not just the lives of future generations, and this has prompted changes to how older clients think about ESG investing. 

She says this means the way pension clients invest is broadly the same as any other client, as awareness of the issues has risen.

Taylor says one way in which pension savers will be impacted in future is through what he calls the “transition.”

He says: “So you hear about companies that have targets to be carbon neutral, for example, by 2050, or 2060, and maybe a pension client needs to know what that will look like in 2025, that is, what impact will making the transition to net zero have on the business between now and the target date? I think this idea of transition investing will be a major theme in future.”

Another theme he expects to be crucial for the future, according to Taylor, is that, at present, asset management firms mostly disclose what is happening at the level of the firm as a whole, rather than at the level of each individual fund, but he expects this to change in future. 

Minesh Patel, an adviser at EA Financial Solutions in London, who is presently taking exam modules in ESG investing, says the key for him when it comes to fund selection is the ESG fund ratings produced by a number of firms, including  MSCI, as a guide to which firms have the most compelling offers.”