Industry is ramping up ESG efforts but more still to do

Many individuals have held deep-seated principles regarding the environmental and social impacts of the financial services sector. However, the mainstream acceptance of ESG as a legitimate tool within financial institutions has been a relatively recent phenomenon. 

Indeed, then-UN secretary general Kofi Annan sparked the initial ESG flame in 2004. Annan wrote to more than 50 chief executives of major financial institutions, inviting them to join an initiative to find ways to integrate ESG into capital markets.

This initiative was backed the following year by a report entitled Who Cares Wins by Ivo Knoepfel. The report made a case that embedding ESG initiatives into financial markets would result in strong financial benefits for companies and investors alike, while contributing to a more sustainable future. 

Trends indicate that ESG-tailored funds are outperforming their non-ESG counterparts.

From there, financial institutions have been compelled to take such factors seriously. And, given the recent escalation of climate change, the financial sector has been clamouring to ramp up sustainability efforts.

Indeed, in 2020 alone 85 per cent of investors considered ESG factors in their investments, according to Gartner research, highlighting the level of importance individuals are now placing on such principles.

Pensions

Positively, it seems that governments are viewing ESG in a similar way. Last year, for example, the UK government announced it would publish plans to make pension schemes mitigate risks related to climate change, making the UK the first G7 to do so.

With these plans, trustees of pension schemes are statutorily required to report financial risks of climate change within their portfolios. These plans have been imposed on authorised master trusts and schemes with £5bn or more in assets as of October 2021, and they are expected to extend to smaller schemes following a lengthy consultation. 

More and more pension schemes are recognising that they must place sustainability over immediate profit.

While the objective is to phase in these plans gradually, it is clear that the government is taking ESG seriously. In turn, it is highly likely that ESG will become a staple of investment and retirement strategies. 

As such, clients will likely feel inclined to review their existing retirement strategy to see how they can best incorporate ESG. And, of course, it will be the role of advisers to guide them through the process. 

While the government’s plans have not imposed targets onto pension schemes, it is hoped that schemes will use their own initiative to identify areas within which more sustainable practices could be pursued.