Ethical investing involves looking at environmental, societal and governance (ESG) factors when choosing companies, funds and other investments for a portfolio. One way to invest ethically is to use a pension – e.g. a private (or personal) pension or a defined contribution pension offered by your workplace. Yet what is the best way to invest ethically via a pension? Below, our Cumbria financial planners at Vesta Wealth explain some of the main principles to consider when building an ethical pension.
Check your options in your pension
If you want to invest ethically using your workplace pension, then a good first step is to check the range of funds and other investment options it offers. Certain pension schemes might limit you only to “non-ESG” options – e.g. trackers of major indices like the S&P 500 and FTSE 100 – or the ESG funds on offer may be quite restrictive (e.g. concentrating only on a certain country, region or sector, thus limiting your ability to diversify). A financial adviser can help you review your scheme for ESG possibilities and let you know if you might benefit more from opening a personal pension which offers more options.
Check the fine print
Pension providers are increasingly aware that members want more ESG investment options. Yet just because a fund offered by a scheme has the “ESG” label, does not mean that the fund necessarily follows ESG criteria. Remember, in 2023 there are still no universally-agreed criteria that regulators require funds to follow if they wish to be called “ethical” or “ESG”. These terms mean different things to different people and while you might wish to focus on environmental issues, others may be more concerned with social development. This means that “ESG funds” may contain underlying investments which do not align with your values. Here, a financial adviser can help you uncover the fund information to ensure that you are happy with the company selection, fund structure (e.g. its governance) and carbon footprint.
Check the reporting
The Companies Act of 2006 requires companies – including investment funds offered by pension providers – to file regular accounts and reports. Moreover, recently large companies in the UK must now also disclose ESG information if they are listed, exceed £500m in annual turnover or have more than 500 employees. Starting in 2023, ESG reporting will be further formalised under the Sustainability Disclosure Requirements (SDRs). These will help investors to access correct information on how funds impact social or environmental sustainability. Whilst the SDRs should help to guard against greenwashing by funds, it will help to work closely with an expert who can help you understand the different labelling and check fund reporting.
Choose your strategy & goals
What do you want your pension savings to do for you? For instance, are you looking mainly to generate capital growth? Or, are you mostly wanting to preserve your wealth and generate an income from your investments? The latter is likely to be more suited to someone already retired, whilst the former leans more towards someone who is still contributing to their pension. Another key question is what kind of ESG strategy do you want to follow? In particular, how much of your pension do you want to devote to ethical investments?
Some people might want to take a more “exclusionary” approach where funds and companies are left out if they are involved with “dirty” industries (e.g. fossil fuels). Others may want to take a “blended” approach where, say, 50% of their holdings comprise ethical investments whilst the other 50% comprises “traditional” funds (e.g. those which invest in energy companies). Every approach has its pros and cons. For example, the exclusionary approach arguably enables an investor to best align his/her values with their chosen investments. However, it may present a diversification risk if certain sectors or markets are automatically excluded. Financial advice can help you consider the full range of ESG investment strategies and pick the best one for you in light of your value, goals, risk tolerance and time horizon.
Monitor & review
Once you are settled on your desired asset allocation for your pension, it is important to check the performance and balance over time. Keep an eye on how fund ESG credentials change in light of new laws, management and company selections by fund managers. If a fund starts to deviate from your ESG strategy and goals, or the investment performance is lacking, then there may come a time when it is appropriate to replace it. Your financial adviser can help you to monitor these developments and ensure your investments continue to match your objectives.
Vesta ESG
At Vesta Wealth, our in-house investment managers have created and manage an ESG portfolio exclusively for our clients. Our investment managers do not believe any one issue is more important than another. As a result, they do not focus on any specific area of the ESG framework. Instead, they invest in a broad range of funds with a wide range of objectives in promoting positive change both environmentally and socially. We believe this is the best way to achieve a wide range of positive outcomes.
Invitation
If you would like to discuss your financial plan and retirement strategy, or hear more about the Vesta ESG portfolio or our in-house investment team, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.