ESG retirement investing from a client perspective

01 Feb 2022

The growing awareness of the climate emergency and a greater focus on creating a fairer, more inclusive, and equitable society accelerated by the Covid-19 pandemic has led to widespread governmental and regulatory changes.

Among these are the 2017 Taskforce on Climate-related Financial Disclosures (TCFD), publication of the UN's 17 Sustainable Development Goals (SDGs) and Principles for Responsible Investment (PRI).

More recently, an ESG disclosure framework and fund labelling system has been laid out in the EU Sustainable Financial Disclosure Regulation (SFDR). This is now feeding through to our own FCA Sustainable Disclosure Requirements (SDR) which should define and enforce a new ESG labelling system for retail financial products (along the lines of SFDR) as early as the end of this year.

These and other developments are working together to increase ESG-related disclosure by public companies and fund managers dramatically.

For example, public companies have increased their focus on climate-related issues in financial reporting. After all, the TCFD was created to help companies understand what financial markets need and expect as regards the assessment and disclosure of climate-related risks and it has proved a major driver of corporate climate disclosure worldwide over the last five years.

Among the S&P 500 for example, 43% of companies now disclose climate-related risks in their financial reports, up from just 5% in 2012, according to The Conference Board. It's feeding through ‘on the ground' with UK retail investors too. According to Morningstar, we invested a net £35bn into sustainable funds in 2021 and the average return last year from a total pool of 196 sustainable funds available to UK retail investors was 13%.

However, for retail investors who don't want to wait for these labels to be defined, and fund and portfolio changes to be made for them by asset managers, pension trustees or advisers, it makes sense to apply the frameworks laid out in the SDGs and 3-tier labelling system within SFDR as a basis to select some specific shares and funds which address issues you are most concerned about.

The UN SDGs are as follows:

No Poverty
Zero Hunger
Good Health & Wellbeing
Quality Education
Gender Equality
Clean Water & Sanitation
Affordable & Clean Energy
Decent work & economic growth
Industry, Innovation & Infrastructure
Reduce inequalities
Sustainable cities and communities
Responsible consumption & production
Climate Action
Life below water (protect sea life)
Life on land (protecting wildlife and eco systems etc.)
Peace, justice & strong institutions
Partnerships to achieve these goals

It's worth asking yourself the question, ‘which of these sustainability goals are most important to you?' and then draw up a shortlist of public companies you might invest in with a view to moving the needle in those areas of focus. This is often called Impact Investing and it's the idea that organisations or funds can be found, and portfolios constructed with the aim of putting specific things right.

So, if your focus is on improving affordable and clean energy, you might want to invest in companies building components or installing and servicing wind farms for example. Companies such as the Danish-listed offshore wind turbine seller, installer and servicing business Vestas Wind Systems or wind turbine manufacturer and renewable energy pioneer Ørsted. And if you would rather not hold individual shares, then test against your criteria the companies on the list of "top ten holdings" published by the funds you are considering.

If you turn back to the framework of SFDR you might want to explore how deep you want to go with your commitment. Which camp are you in?

Article 6-labelled funds which do not integrate any kind of sustainability into the investment process and could still include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers.

Article 8 applies "where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices."

Article 9, the gold standard of sustainable finance also known as ‘products targeting sustainable investments', covers products targeting bespoke sustainable investments and applies "… where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark." Only about 5% of financial products are currently labelled Article 9 and about 7% of retail funds.

Finding the right investments to protect growth, while putting a portion of your pension pot to work to slow down climate change is challenging. However, it will be increasingly easy to research public companies with genuinely strong and verifiable ESG records as more detailed and mandatory ESG reporting is demanded by regulators. There is even talk of adding an ‘ESG factsheet' to Key Investment Information Documents (KIIDs) affecting many EU-originated investment products.

There are a good number of investment advisory businesses that can assist you with realigning a portion of your pension pot with your personal sustainability goals, while not exposing you to unacceptable risk of losses. Now is the time to begin that work if you care about building a fairer, more sustainable economy for the future.

And once you have completed your own research and selected preferred shares or funds, why not become an advocate for your selections, spreading the word about specific organizations' ESG credentials via your social media channels of choice?

Others will be grateful that you have done the leg work for them. In this way, you will be playing your part in combatting inevitable market apathy as many struggle to understand the growing mix of institution led ESG benchmarking and rating agency methodologies for ESG performance measurement which are now emerging.

On Thursday 27th January 2022, Dunstan Thomas discussed how companies gather the necessary ESG data, measure and compare it accurately with peer group averages, and then report on it at EU and national regulator-level and what is all this likely to mean for fund, portfolio, and stock selections in 2022.

Watch the session with Andrew Martin, Adrian Boulding, Manjit Jus and Graham Precey by clicking the button below.

by Adrian Boulding, Director of Retirement Strategy at Dunstan Thomas.