ESG Investing  

Clients have plenty of choice for their pension savings

This article is part of
Guide to ESG and pension investing

The explosion of ESG demand has brought plenty of business-hungry asset managers and new products into the mix.

Stumbling blocks

If individuals do wish to pick the best option they can often access information on their workplace pension online or request information from the provider – but limited understanding, and the difficulty of unpacking what a fund actually does, can still get in the way.

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Balance Wealth’s Rebecca Aldridge puts this starkly enough. “Do clients understand how funds in a pension or elsewhere match their ESG values? Not at all – by a long shot,” she says. “This is where I think the issue is: the fund management companies have created funds that purport to be ethical but it’s incredibly difficult finding out what the fund actually stands for.”

As she notes, the disclosure available does not always give the full picture of how a fund stands out.

While a fund may be badged as ethical or sustainable, with a mention of such terms in the investment objective, the information available can still be limited. Not all providers explain exactly what their investment process is.

Meanwhile factsheets offer a mere glimpse into the workings of a fund, with a description of its biggest 10 holdings and broad asset allocation. Investors do not always have full details on whether a fund excludes poorly scoring investments or includes those with strong ESG credentials, and what exact metrics are being used.

Rowena Griffiths, of Female Financial Management, notes another issue: workplace pensions often use passive funds, whether these are multi-asset offerings or confined to likes of equities. She, like some others, has questions about how ESG and passive marry up, noting: “I’m not sure how ESG works with that”.

ESG passives are certainly on the rise and theoretically may be more of a blunt tool than stockpicking when it comes to building an ESG portfolio.

But some of the ESG indices and metrics used are growing more targeted and sophisticated. Some indices, such as MSCI’s SRI range, have been identified as taking a stricter ESG approach.

As with many shortcomings related to ESG investing, improvements could be on their way. As noted, Royal London does explain elements of its process, with providers increasingly looking to outline their approach.

In future, investors may even look to other metrics, such as whether pension and fund providers walk the walk on governance issues, and whether asset managers are taking part in shareholder votes on contentious issues on behalf of shareholders.

But for now, advisers and their clients may hope for better disclosure from the funds available in pensions. In time, clients may be able to get a better idea of what suits their preferences best.