ESG Investing  

Advisers must keep track of changing client demand

This article is part of
Guide to ESG and pension investing

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.

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.