Using transitioning companies to promote sustainability goals

This article is part of
Guide to pensions and ESG

Using transitioning companies to promote sustainability goals
Credit: Unsplash

As investors become more savvy, they will increasingly be asked about how environmental, social and governance principles are reflected in their pension pot.

And where someone is looking to retire in, 20, 30 or even 40 years' time their adviser might look to employ a different approach depending on the length of time they want to invest for.

Dominic James Murray, director at Cameron James, says any client, irrelevant of their age, who has a 30 to 40-year investment time horizon, should be taking on a far greater level of risk if they are comfortable to do so.

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He explains: “There will likely be numerous financial crashes and recessions over a 30 to 40-year period, and as such, the client has sufficient time to weather the storms.

“Clients with an investment timeline of up to 10 years can obviously still take risk, but they have to be aware of the possibility for a market correction during those 10-years and how it may affect their portfolio value.”

Kate Capocci, co-manager of the sustainable managed portfolio service at Tilney Smith & Williamson, says: “When choosing a fund it’s important to understand the process, philosophy and investment team.  

“They have control over the underlying stocks, so you want to have a solid process that also matches your own values and a team that you can trust.”

Regulation of ESG

The awareness that clients have about ESG investments is likely to accelerate further as regulation catches up.

Created to develop consistent climate-related financial risk disclosures to be used by companies, banks and investors, the Task Force on Climate-Related Financial Disclosures is an existing global voluntary framework created in 2015 by the Financial Stability Board to increase the amount of information and transparency at the business and investment level, giving investors and others the ability to assess, and price, climate-related risk and opportunities.

As reported by FTAdviser, rather than creating a new regulatory framework, the Financial Conduct Authority has selected to adopt and provide flexibility around an already existing and widely accepted international framework. The hope is that this will allow businesses to better integrate the new rules with any current existing ESG frameworks they may be reporting under. 

The FCA began implementation of the TCFD recommendations on January 1 2022 for asset managers with assets under management greater than £50bn, with a publication deadline on the June 30 2023. The second phase will be effective from January 1 2023 for remaining asset managers with AUM greater than £5bn, with a publication deadline of June 30 2024.

Currently, the different types of investing principles that fall under the ESG banner means that different strategies will achieve different objectives for clients.

Socially responsible investment generally focuses on excluding sin stocks from the investment pool based on negative screening guidelines.

Thematic investing is unconstrained by traditional geographic and sector demarcations focusing instead on top-down systemic shifts.