In the investment world, we are currently seeing a shift towards more sustainable investing. The European Union legislation, due to be introduced this year, will require financial advisers to ask clients about environmental, social and corporate governance (ESG) preferences and, for those who are interested, they will need to provide a sustainable investment option. Under this legislation advisers will need to clearly document their process and be able to evidence why certain clients did not select the sustainable investment option.
The expectation is that this legislation will result in a paradigm shift towards more sustainable investing, similar to the societal shift towards smoking outdoors or using reusable shopping bags.
A key principle of sustainable investment is that pension trustees must base their decisions not just on what they think will make the most money but will also consider how the investment company interacts with the environment, with their staff and local communities and whether they adhere to a principle of diversity. In simple terms, ESG investing is about looking at the broader implications an investment may have on our climate, so we can expect more investment in wind farms and less in coal companies.
Under the new legislation, the EU will also require more clarity from ESG Fund Providers as to what constitutes sustainable and what does not. The new legislation will outline two broad categories of funds in this respect:
1. Under Article 8, for light green funds where the manager markets the fund as having ESG features, they must explain what those are and how investors can assess if the features are being achieved;
2. Under Article 9, which covers dark green funds where the product is targeting a specific sustainable outcome, such as climate change, in which case the manager will need to be clear on how the investment will help address this particular issue and how they avoid the ‘bad stuff’ that has a negative impact on climate change.
Another benefit of sustainable investment from an investor’s perspective, is that it may help increase returns. A report issued by Morningstar in August 2020 found ESG funds, which have been around for 10 years, have, on average, outperformed traditional funds. This shows that companies that have a strategy in place to help tackle climate change, treat their staff well and understand the importance of having diversity of thought at management level, are likely to perform best over the long term.
These days investment returns are not the only thing pensioners are interested in. They want to see a better world for their families and future generations. This new legislation can unite these two interests and show the power your pension can have to bring about positive change.
*Please note this content is the view of the author and not of Independent Trustee Company