ESG InvestingFeb 18 2021

Clients have plenty of choice for their pension savings

Supported by
Scottish Widows
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Supported by
Scottish Widows
Clients have plenty of choice for their pension savings
Pexels/Meru Bi

ESG product development broke new records in 2020 according to Morningstar, with 505 new sustainable funds launched in Europe and a further 253 portfolios either repurposed or rebranded as such.

This growth brought the total number of European sustainable funds to 3,196.

The level of choice available to an investor populating the likes of a stocks and shares Isa is huge – and sometimes confusingly so. And a similar momentum can be seen in the pensions space – while workplace pensions inevitably tend to offer a more limited selection of fund choices, providers are increasingly looking to offer ESG-friendly options.

For advisers with clients who want to ensure an ESG-friendly approach across all their assets, this can be a useful development. But some of the usual problems associated with ESG investing are hard to avoid here: it can be difficult to tell exactly what a fund holds, and not all clients will be able to identify the best options for them. Understanding the products available and being able to explain their approach could grow in importance over time.

What’s on offer

It is likely that pension providers will increase their use of ESG funds, and some of the options are already laid out. Scottish Widows, for one, offers options include an Environmental and an Ethical fund, each of which are run by Schroders and predominantly focus on UK equities. A version of Columbia Threadneedle’s UK Social Bond fund is also available, as is an equity fund run by noted ESG investor Federated Hermes.

Elsewhere, some firms that already have an ESG specialism can feed this into pension offerings. Royal London has a mixture of strategies including some of its sustainability-minded active equity funds. Its range takes a sustainable slant, which the firm defines as being primarily driven by screening potential holdings for positive traits in areas such as social and environmental impact, as well as corporate governance.

Royal London differentiates sustainable from ethical, which it views as more driven by negative screening – avoiding problematic areas such as environmental, animal testing, firearms, pornography, tobacco and gambling.

Some familiar names may appear in different pension offerings, especially in more niche areas. Standard Life uses the UK Social Bond fund alongside Scottish Widows, for example.

Providers may also tend to use some of their more established in-house offerings: Standard Life includes the ASI UK Ethical Equity fund, run by Lesley Duncan, among its pension offerings, for example.

Do clients understand how funds in a pension or elsewhere match their ESG values? Not at all Rebecca Aldridge, Balance Wealth

With the ESG space attracting more attention, it is likely that pension providers will increase their focus on this, with an emphasis on the options available to investors. There could also be a push towards making default funds – held by the vast majority of individuals – more ESG-oriented. But what does this mean for clients?

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.

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.

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