ESG: The future of pensions?

8 June 2022

Is ESG in pension saving as prevalent as might be expected or are there certain hurdles preventing individuals from being able to truly explore ESG options within their pension strategy? asks Andrew Megson, executive chairman of My Pension Expert 

Whilst the popularity of Environmental, Social and Corporate Governance (ESG) initiatives have snowballed in recent years, the premise is not exactly new.

The enthusiasm for initiatives was ignited in 2004, after then-UN secretary-general Kofi Annan wrote to 50 CEOs within financial institutions urging them to integrate ESG initiatives into capital markets. Following this, multiple reports and investigations added clout to Annan’s campaign. Consequently, ESG has become central to the strategies of financial institutions.

And this enthusiasm seems to be trickling down to individuals as well. Indeed, a recent survey amongst 1,003 UK adults aged 40 and over with pension savings, commissioned by My Pension Expert, found that over two fifths (43%) of respondents understand what ESG is and why it is important.

Better yet, there is clear support for government policies which promote and enforce ESG initiatives within the pension sector. Indeed, 43% of adults aged 40 and over support the UK government placing pressure on pension schemes to transition away from investments that drive deforestation. Over a third (36%) also claim to be in favour of policies which compel UK pension schemes to help mitigate climate change.

These figures are certainly encouraging. Indeed, they allow for the inference that the public are becoming more aware of the environmental, social and governance issues which can be tackled – in part – by sustainable financial management.

That said, such support and awareness of ESG does not necessarily result in action.

Inactive savers

My Pension Expert’s research revealed that just 15% of pension planners consider ESG within their retirement strategy. Even fewer (7%) consider ESG policies when selecting a pension provider, scheme, or investment.

These figures are arguably not reflective of the initial awareness and support for ESG previously outlined. Therefore, one could conclude that there are certain hurdles which could prevent individuals from being able to truly explore ESG options within their 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.

The question, therefore, is how can access to such information be improved?

Information availability

Of course, Britons must be encouraged to conduct their own due diligence when it comes to researching ESG, as well as the plans and policies of various schemes, investments and providers. However, as highlighted earlier, this is near-impossible if such information is inaccessible.

Firstly, free consumer finance platforms such as Pension Wise, Citizens Advice and Which? should all ensure information regarding ESG. (i.e., what it is and why it is important) is readily available to consumers. Access to such information will help them to develop a well-rounded understanding of ESG and place them in a stronger position when it comes to developing an ESG-centric strategy.

Accordingly, the government and regulatory bodies must work together to ensure that pension providers, schemes, and businesses in general have clear guidance regarding how to publicly report their ESG information. Access to such information will be absolutely vital when individuals begin to make financial decisions whilst factoring in ESG.

That said, access to information is one thing, but it can be overwhelming. Even if an individual develops a plan which is in keeping with their ESG preferences, it might not be financially appropriate. Consequently, they may find themselves worse off when they approach their desired retirement age.

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 value of advice

It is therefore crucial that the government and regulatory bodies ensure that pension planners have access to independent financial advice. Advisers will be able to analyse the entirety of an individual’s financial situation, personal preferences, and financial goals and, in doing so, help them to develop a strategy which is in keeping with their ESG principles.

Accordingly, the government and regulatory bodies must work closely with advisers to provide adequate support and guidance, both in terms of monitoring ESG within pension providers, schemes and investments. Equally, they must ensure that adequate information is provided to ensure that savers know exactly where to go for affordable advice. In doing so, they will ensure that individuals are able to make the most informed decisions regarding their ESG-centric retirement strategies.

ESG is incredibly important – and encouraging more people to incorporate such initiatives into one’s retirement strategy is crucial. That said, it will be near impossible to achieve this without access to the right information and, indeed, independent financial advice to help savers make the most informed decision possible. So, the government must commit to working closely with regulatory bodies and advisers to ensure all this is possible. And in doing so, I hope to see more and more people contributing to a progressively sustainable future whilst achieving the best retirement outcome.

[Main image: ravi-roshan-_AdUs32i0jc-unsplash]

Professional Paraplanner