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Kirk Rice Blog

ESG and Socially Responsible InvestmentsWritten on August 21, 2019 by Kirk Rice LLP

ESG and Socially Responsible Investments
Financial Services Questions

The Question:

Can I stop my pension fund being used to invest in activities that damage the environment and exploit people?

Kirk Rice LLP answers:

You may be able to do just that, but how you can achieve it will be determined by the type of pension you hold.  These issues are brought together under 2 acronyms ESG (Environmental, Social and Governance); or SRI (Socially Responsible Investments).

The trustees of all pension schemes must publish a Statement of Investment Principles (a SIP) at least every 3 years. This will show how they address Environmental, Social and Governance issues. Many pension trustees determine that this is a major factor in their investment decisions and make available suitable investment funds where you can exercise choices about your money, such as within AVCs; Defined Contribution; Auto enrolment; Money Purchase and Personal Pensions (including SIPPs).  Some go so far to say that it governs all decisions they make over money that is invested.

Older plans may not include these options as they often have limited fund choice.  You may need to transfer your money to a newer pension plan to access a choice of ESG funds.  Many providers will enable you to transfer to a modern product without charge, but remember they cannot advise you if it’s in your best interests to do so.

In a ‘final salary’ or ‘defined benefit’ pension trustees make investment decisions on behalf of members and will report consideration of ESG or SRI factors.  You are unable to prevent money going into specific activities you personally object to.  Most pension funds are invested in Oil & Gas; Coal; Pharmaceuticals; Gambling; Weapons and Tobacco as these have proven to be able to provide some of the best returns to meet the pensions promised to members.  Some pension schemes will have a policy to exclude tobacco, weapons and gambling, but I do not believe there are many that avoid the others.

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If you are in a Workplace pension (including auto enrolment schemes) you should find that there is an ESG or SRI specific fund(s) that you can choose to invest in.  Unfortunately, this does not mean all the underlying investments are not involved in activities that you might wish to avoid.  These investment funds invest where there is a positive approach or improving impact.  There are funds that simply ban companies involved with some activities (e.g armaments, tobacco and gambling).

There are many global issues (e.g. deforestation, carbon emissions; water pollution, loss of habitats, loss of species) and even if you face the impact of these now it is difficult to ensure that your pension money is not invested in or lent to companies that are associated with such activities.

Most fund companies have launched a socially responsible fund.  A research check today reveals there are over 800 socially responsible investments (SRI) available in GBP denominated funds. Only 122 have more than 3 years history to make judgements about their consistency and performance relative to standard funds.

As yet the various bodies which set the criteria for different sectors of the market, do not have one named ESG or SRI.  An ESG compliant fund that invests in UK shares is compared to other funds investing in that market and will be categorised by UK sector rather than highlighting it’s ESG credentials.

The main online investment research firms do provide a filter to find these funds and many more people are choosing this type of fund.  One of these provides a tool that assesses all funds and ranks them relative to each other.  The majority of funds will have work to do and I wonder if many of them deserve to be ranked in such a way when they might not be actively doing anything about these issues.

SRI and ESG funds will be active through their shareholdings, taking up issues to the Board at Shareholder meetings.  They will seek to work with these parties for the improvement they want or disinvest if nothing changes.  Some may choose to stay invested if the situation is improving, which may not be what you want.

Some funds may focus on a single aspect, such as direct Environmental (or Green) issues and will seek to measure the impact they are having and report this to investors.

Many investors believe ESG consideration should become a routine part of investing. The rapidly increasing number of ESG funds demonstrates that this is possible now.

An example of this is the Vegan Climate Exchange Traded Fund (ETF) – it excludes companies engaged in animal exploitation, defence, human rights abuses, fossil fuels extraction, energy production and other environmentally damaging activities.  At first glance I thought this would be an ESG or SRI qualifying fund.  Amongst its investments it holds shares in Microsoft, Apple, Facebook Bank of America, Cisco, AT&T and Mastercard amongst others so it may not be much different from other funds.  However, many people looking for SRI or ESG compliant investments would not invest in Facebook because of their collection and misuse of personal data.  Others would want to understand how the activities of a credit card company and bank are aligned to the funds declared intentions.  The fund may become available to UK investors in the future.

If you feel strongly there are plenty of choices available for you to invest your money, although you need to be clear what it is you wish to invest in or avoid.  An adviser would be able to research the market for funds that meet an agreed criterion and then decide how best to access them for your investment portfolio.  Your existing portfolio should be screened to see how well it is meeting your criteria.  As in the example above many standard funds have investments in companies that would also be held within the ESG focussed funds.  The impact of selling existing funds and buying new ESG funds needs to be considered as you’ll be out of the market for a few days and you may be repurchasing companies already held.

Where there is data for at least 3 years on a proposed fund an adviser can demonstrate how the ESG funds have performed compared to a standard fund or your existing portfolio.  This can reveal whether the new strategy has more or less volatility and whether it follows the same market movements.

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Any reader interested in discussing ESG investment options can call 01344 875 000, 01252 960 500 or 0208 789 8588 or email info@kirkrice.co.uk to speak with one of our financial planners.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. The FCA does not regulate tax and trust advice.

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