Incorporating ESG into retirement strategies

By Andrew Megson, executive chairman, My Pension Expert

Environmental, social, and governance (ESG) has come to the forefront of policymaking within the financial services sector throughout the last the decade. Indeed, many industry leaders are keen to introduce ESG into their operations.

A mixture of changing laws, regulatory rules, and growing demand from investors has influenced this push in collective conscientiousness that only took hold in the mid-2000s.

In 2004 then UN Secretary-General Kofi Annan wrote to 50 CEOs within major financial institutions, inviting them to join an initiative to find ways to integrate ESG into capital markets. Since then, numerous reports and investigations have offered further support to the initiative. Consequently, ESG has gone on to become a significant consideration for organisations of all sizes.

Public demand has almost certainly contributed to the increase in ESG as people factor it into their own investment strategies. In 2020, 85% of investors considered ESG factors in their investments, highlighting the importance of organisation’s ESG reputation amongst the public.

A more ESG pension investment

Investors are becoming increasingly aware of the fact that their investment plans have a significant impact on sustainability – notably, there has been a shift in attitudes towards retirement strategies.

Indeed, recent research from Aviva discovered that over seven in ten (72%) pension planners to consider ESG to be important when managing their pension investments. To meet these changing demands, pension schemes have responded by incorporating ESG into their own strategies.

In 2021, Tesco announced that the investments in both of its pension schemes would meet carbon neutral targets eventually becoming net-zero by 2050 – such investments make up £24 billion of their overall assets. Without a doubt, this presents a strong message that investment firms are committing to ESG.

And for good reason. According to research from Aviva, Make My Money Matter and the World Wide Fund for Nature (WWF), trading the average UK pension for a sustainable equivalent reduces some 19 tonnes of greenhouse gas emissions per year, almost three times the average UK carbon footprint. Naturally, UK workers are for this with more than half (52%) stating they would opt for a ‘green pension’ if their provider offered one.

Meanwhile, organisations should also ensure they do more to remain on track regarding the other aspects of ESG. Schemes should outline how they promote diversity, and how the organisation impacts local communities. For example, the UK’s largest pension scheme, Universities Superannuation Scheme, has announced that they will completely withdraw investments in tobacco manufacturing, and weapons manufacturers.

Looking ahead

Clearly then, ESG has become an important consideration in the investment strategies of pension schemes. As such, the retirement industry must act accordingly to assist people in their efforts to understand ESG and how incorporating it into their retirement strategy can help them achieve their sustainability goals.

Firstly, improving access to independent financial advice will be crucial. Independent financial advisers can work with individuals to help them find pension schemes which operate within sustainable sectors and help them decide which sectors might or might not suit their ESG ambitions.

Additionally, the government and regulatory bodies must work together to ensure that advisers are sufficiently supported in seeking ESG investments. Currently, there is no standard definition of ESG practices, therefore different organisations have different approaches. This also means that some organisations that are attempting to make a difference are overlooked due to a lack of resources to conduct research.

Transparency is also key. Companies that have announced net-zero plans could still be investing large amounts into unsustainable practices. As such, the government should implement policy that ensures mandatory transparency between advisors and investment providers. As a result, pension schemes would be required to publish the environmental and social impact of their investment strategies – therefore allowing advisers to find schemes and investments that match clients’ ESG ambitions.

The retirement sector has already made considerable moves towards ESG policies. This has been further supported by the government’s actions in making pension schemes mitigate climate-related risks. However, more needs to be done by the government and regulatory bodies to ensure that advisors receive the right support to find ESG investments for their clients through improving investment standards and practical information on the subject. With these changes in place, ESG will only go from strength to strength, and Britons will be able to feel secure in the sustainability and financial outcomes of their investments.

About Author:

Andrew Megson is the Executive Chairman of My Pension Expert, the UK’s number one Advised Retirement Income Specialist. Founded in 2010, My Pension Expert specialises in providing independent advice to UK consumers about their pension plans – it arranges millions of pounds worth of retirement income options each week.