What’s stopping ESG in pension planning?

By Andrew Megson, executive chairman of My Pension Expert

The foundations of environmental, social, and corporate governance (ESG) were laid nearly two decades ago now, and in recent years the approach has skyrocketed.

While pushes for sustainability have always been around in some form or another, the term ESG appeared in the early 2000s when initial calls for initiatives to be implemented were made. Since then, multiple reports and investigations have added to this call to action, and ESG has become central to the strategies of financial institutions.

Recent research commissioned by My Pension Expert revealed the awareness of ESG amongst the public has risen too. The survey of 1,003 UK adults aged 40 and over with pension savings found that over two fifths (43%) of respondents understand what ESG is and why it is important.

Further, increased awareness of ESG seems to be turning to support for government policy that promotes and enforces initiatives within the pension sector. 43% of adults aged 40 and over support the UK government placing pressure on pension schemes to transition away from investments that drive deforestation. Meanwhile, over a third (36%) also claim to be in favour of policies which compel UK pension schemes to help mitigate climate change.

More awareness of ESG and its potential to tackle problems through sustainable financial management is encouraging. Indeed, it should act as a promising sign that the industry is heading in the right direction regarding sustainability.

However, awareness does not necessarily guarantee action.

Awareness not on the same level as action

Despite a clear shift in priorities towards sustainability, most savers have not yet incorporated ESG criteria into their financial planning. In My Pension Expert’s survey, just 15% of pension planners had considered ESG in their retirement strategy. Further, only 12% stated they conduct due diligence to ensure their pension investments are in keeping with ESG preferences.

These figures highlight a disconnect between the increasing awareness and support for ESG and the actual implementation of it, suggestions certain obstacles are preventing savers from exploring ESG for their own pension strategy.

Indeed, almost half (45%) of adults aged 40 and over would like pension schemes to make their ESG information more accessible to savers. This suggests that, despite government initiatives, there is not yet complete transparency when it comes to ESG pension information; and this could explain why many individuals are unable to consider ESG when developing their retirement strategies.

As such, it is crucial that a system of readily available information is established.

Information availability

Ensuring that the public are adequately informed regarding ESG is crucial to boosting engagement. While savers and investors should be encouraged to find ESG information among schemes, investments, and providers where their money is going, it can become challenging when such information is inaccessible.

There are plenty of free personal finance informative websites out there that could play their part. Platforms such as Pension Wise, Citizens Advice and Which? could offer a breakdown of the term, not only describing it but why it is so important. This would foster an industry built on a well-rounded understanding of ESG, particularly important for age groups with less awareness.

More importantly, the government and regulatory bodies must work to outline clear guidelines for pension providers on how to provide online information about their ESG activities, such as initiatives, results, and progress, for clients and advisers to see. Without this information, it becomes impossible for retirement planners to make financial decisions that accurately implement ESG.

However, having all the right information does not necessarily mean that creating a retirement strategy which meets a planner’s sustainability goals will not be a complex process. As with all financial planning, the process can be overwhelming, and not all consumer preferences will be in keeping with the financial situation.

As such, it is equally important for pension planners to have access to the right help to guide them through the complexities of an ESG retirement strategy.

The role of advice

Independent financial advisers can play a crucial role in helping planners understand ESG criteria before taking their preferences and financial situation into account to find the right strategy that agrees with their sustainability goals.

The government and regulatory bodies, therefore, must work to ensure access to advice. Working closely with advisers, they must provide support and guidance on how to identify and monitor ESG within pension providers, schemes, and investments.

Likewise, sufficient information must be provided to pension planners so that they know where to find affordable advice. This will ensure that all savers are able to make informed decisions regarding their retirement strategy in a manner that matches their sustainability goals as closely as possible.

Moving towards a more fair, equal, and sustainable world will need to include the efforts of the financial services industry – and one that places ESG at the centrepiece of all its operations. Achieving this will mean encouraging more people to apply ESG to their own financial planning. As such, the government and regulatory bodies must work together to increase both access to information and access to affordable independent financial advice. Making these changes will lead us on the right path to a sustainable future whilst still helping people achieve the retirement outcomes they deserve.

Author Bio:

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.