ESG InvestingFeb 18 2021

Advisers must keep track of changing client demand

Supported by
Scottish Widows
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Supported by
Scottish Widows
Advisers must keep track of changing client demand
pexels/Katerina Holmes

There are few obvious silver linings from a year dominated by the Covid-19 pandemic but one relates to ESG investing.

In Europe, flows into sustainable funds over 2020 came to €233m, according to Morningstar, double the amount recorded in the previous year.

ESG-friendly investments not only hit a tipping point in terms of demand but also fared relatively well in a volatile year, challenging the doubts once posed by critics.

The hype around ESG appears to have finally fed into investor portfolios – and into some of the conversations advisers now have with clients. Even individuals who appear less interested in the ethical and social side of their portfolio are, at least, aware of the concept.

They certainly know what I mean when I ask the question and increasingly they have a view about whether they don’t care about it all or care very deeply Rebecca Aldridge, Balance Wealth

“There is a vastly increasing consciousness about how to live sustainably and ethically,” notes Rebecca Aldridge, of Balance Wealth. “Does that translate into investments? I have seen a definite trend in clients being interested in that direction.

“They certainly know what I mean when I ask the question and increasingly they have a view about whether they don’t care about it all or care very deeply.”

All this bodes well for advisers looking to guide ESG-minded clients, and the options are plentiful when it comes to investments that could be included in a portfolio. As we note elsewhere in this guide, an issue may in fact relate to the explosion of choices on offer, and telling suitable, genuine ESG funds from those that might not walk the walk.

Yet other issues remain for advisers looking to guide ESG-minded clients. Intermediaries are seeing mixed levels of interest in the ESG credentials behind a client’s workplace pension. And while changes are making pensions more attractive on this front, intermediaries and their clients have much to keep track of.

ESG pensions: mixed levels of interest

The Association of Consulting Actuaries recently declared a “huge increase in member interest in ESG”, noting that 52 per cent of pension schemes covered in its research had reported greater interest.

The organisation added that 45 per cent of schemes were taking climate risk into account when selecting investment managers. This might be a trend driven in part by younger employees, but not entirely. “It tends to be a bigger issue with younger members but not exclusively so,” notes Kay Ingram, of LEBC.

If all of this is progress, advisers suggest that workplace pensions are yet to become an obvious part of the ESG conversation with clients. When asked, advisers generally suggested low client awareness of workplace pensions as part of an ESG toolkit.

For intermediaries, this may mean that they have to urge ESG-minded clients to properly assess their workplace pension and consider the options available. Requesting the relevant reports or checking pension accounts can be a step in the right direction, alongside assessing the funds on offer.

Yet intermediaries and their clients will also be kept busy following fresh developments in this space, with recent changes seeming to force a greater ESG focus from pension schemes.

A new world

Several advances occurred in 2020. In one development that should catch the attention of some less financially savvy individuals, film director Richard Curtis launched the Make My Money Matter campaign, urging people to check where their pension is invested and direct the money to “good” assets.

The campaign’s website notes that a good deal of pension money “funds harmful industries like fossil fuels, tobacco and arms”. The campaign adds: “We’re here to demand it does better, through investments that do good not harm, and by using our pension power to ensure the companies we invest in do the same.”

Disclosure on this front should improve, thanks to the pension schemes bill approved last year. The bill proposed that schemes adopt the recommendations of the Task Force on Climate-Related Financial Disclosures. Under the new regime, pension trustees have a legal duty to document their policies when it comes to significant financial considerations including climate change, as well as documenting their policies on investor engagement and voting.

Reflecting a shift in where the industry is headed, pensions have moved to embrace ESG preferences. Nest, the UK’s biggest pension scheme, announced that it would divest from carbon-heavy investments, while industry bodies have pushed for further action. Scottish Widows recently made its own net zero pledge.

Even with pensions adopting this change, it is still worth closely monitoring what is occurring in a client’s scheme. As in any investment fund, the interpretation of ESG can differ from one portfolio to another.

Reflecting a shift in where the industry is headed, pensions have moved to embrace ESG preferences

Some schemes may define ESG goals differently, and their fund choices will differ, as driven by a variety of considerations. Importantly, individual ideas of ESG will also continue to differ – meaning advisers cannot assume a new, ESG-friendly default fund will be the best option for a client.

Some have already encountered specific requests, to a limited extent. While not generally seeing much ESG engagement on the pensions front, chartered financial planner Scott Gallacher notes he has previously had to account for specific religious views when recommending a pension scheme for a corporate client.

Many advisers could also find themselves catering to specific demands as ESG views become more defined.

With climate change and social issues continuing to climb up the agenda, workplace pensions will likely crop up in more client conversations, especially as younger individuals drift into the advice pool. But the integration of ESG into the workplace pension will mean more, not less, due diligence.

Dave Baxter is deputy personal finance editor of Investors Chronicle and deputy editor of Asset Allocator