The explosion of ESG demand has brought plenty of business-hungry asset managers and new products into the mix.
ESG product development broke new records in 2020 according to Morningstar, with 505 new sustainable funds launched in Europe and a further 253 portfolios either repurposed or rebranded as such.
This growth brought the total number of European sustainable funds to 3,196.
The level of choice available to an investor populating the likes of a stocks and shares Isa is huge – and sometimes confusingly so. And a similar momentum can be seen in the pensions space – while workplace pensions inevitably tend to offer a more limited selection of fund choices, providers are increasingly looking to offer ESG-friendly options.
For advisers with clients who want to ensure an ESG-friendly approach across all their assets, this can be a useful development. But some of the usual problems associated with ESG investing are hard to avoid here: it can be difficult to tell exactly what a fund holds, and not all clients will be able to identify the best options for them. Understanding the products available and being able to explain their approach could grow in importance over time.
What’s on offer
It is likely that pension providers will increase their use of ESG funds, and some of the options are already laid out. Scottish Widows, for one, offers options include an Environmental and an Ethical fund, each of which are run by Schroders and predominantly focus on UK equities. A version of Columbia Threadneedle’s UK Social Bond fund is also available, as is an equity fund run by noted ESG investor Federated Hermes.
Elsewhere, some firms that already have an ESG specialism can feed this into pension offerings. Royal London has a mixture of strategies including some of its sustainability-minded active equity funds. Its range takes a sustainable slant, which the firm defines as being primarily driven by screening potential holdings for positive traits in areas such as social and environmental impact, as well as corporate governance.
Royal London differentiates sustainable from ethical, which it views as more driven by negative screening – avoiding problematic areas such as environmental, animal testing, firearms, pornography, tobacco and gambling.
Some familiar names may appear in different pension offerings, especially in more niche areas. Standard Life uses the UK Social Bond fund alongside Scottish Widows, for example.
Providers may also tend to use some of their more established in-house offerings: Standard Life includes the ASI UK Ethical Equity fund, run by Lesley Duncan, among its pension offerings, for example.
With the ESG space attracting more attention, it is likely that pension providers will increase their focus on this, with an emphasis on the options available to investors. There could also be a push towards making default funds – held by the vast majority of individuals – more ESG-oriented. But what does this mean for clients?
