'Pensions have done more than most for ESG but it's time for more action'

We are not. Clients are confused, and despite pockets of excellence, sustainability challenges are getting worse not better.  

And neither of these will be addressed by investors sidelining real world problems or inciting ambulance chasing.  

Conflating welcome mass-market improvements, like entry level responsible ownership activity and ESG integration with redirecting investment and ambitious stewardship will neither reduce systemic risks nor please clients.  

It facilitates distrust and allows carbon emissions to continue to rise.

These risks are particularly acute in the pensions market where people save for the longer term and don’t always actively manage their investments. 

Having been the first area to adopt what we might now call ‘ESG rules’ in 1999, this market has done more than most.

Expectations and reality are currently far too far apart.

The Pensions Regulator announced last month that it will be increasing its focus on "climate and ESG non-compliance’.  

This will involve looking into whether scheme trustees have statements of investment principles that make clear how they invest and manage financially material ESG and climate factors, which TPR offers training on.  

It will also be checking up on implementation statements. Schemes of more than £1bn assets also have Task Force on Climate-Related Financial Disclosures reporting requirements.  

This is all unequivocally positive, but what about everyone else?  

Time for action

One area that could be a straightforward win for defined contribution pension providers would be to adopt the Financial Conduct Authority's sustainability disclosure requirements rules, when finalised.  

This would mean limited additional work for most, as most retail pension funds are OEIC sub-funds.  

I am far from neutral, having worked in sustainable investment for nearly three decades and helping the FCA in an advisory capacity, but I believe it is eminently sensible to arm scheme members with better information, alongside Isa and other investors.

This would not reverse climate change overnight, but it would make it easier for people to redirect capital in ways they are more comfortable with – a small step in the right direction.

It would also make it easier for advisers to understand the different approaches funds take to sustainability risks and opportunities, and so make client/member conversations easier.  

The FCA Financial Lives survey consistently tells us that most people don’t want to invest ‘purely for profit’ (81 per cent last year).  

We know views vary, but expectations and reality are currently far too far apart.  

For example, our Fund EcoMarket database tells us that just 193 of the 1,279 sustainable, responsible, ESG and ethical funds say they aim to:

• Deliver positive impacts and outcomes;
• Measure positive outcomes;
• Invest more than 25 per cent in environmental and/or social solution companies; and
• Exclude coal, oil and gas majors.

Some are promoted as ‘impact funds’ – most are not. 

The new SDR and labelling rules have not yet been finalised, but I’d urge caution when dealing with anyone who does not support its core tenets: better disclosure, client friendly labels and a higher bar.  

Ensuring retirement clients are not misled by fund names or marketing, setting clear sustainability related objectives, explaining fund policies – including real world aims, as applicable – and reporting on how things are going should be straightforward for any fund promoted as ‘sustainable’.

Scheme providers should also welcome the general anti-greenwash rule and disclose ‘surprise holdings’ as useful safeguards for all.  

We cannot predict how providers will respond when this goes live, but we do know individual funds will have the option to either adopt the rules or stop calling themselves sustainable.  

Whichever route a fund takes, product providers will be able to offer free switches when needed – as most do already. We need to deal with this swiftly and look forward not back.

The new regime will also make it possible for schemes to consider whether or not members can access funds that encourage improvement, hold demonstrably sustainable assets and focus on solutions companies (ie the three labels).  

This must be better than guessing what any given member might want. It may even enthuse and help engage some members.

Julia Dreblow is founder SRI Services