While return on investment may be top of the agenda in most cases, people increasingly want reassurance that their pension fund is invested in ethical and green assets. This wish is intensified by growing regulation in the arena, with the IORP II directive also requiring pension trustees to take the ESG dimension into account when deciding on investment strategy.
A combination of regulation and investor pressure means pensions are already beginning to turn green. But financial advisors say that switching up a longstanding pension to more sustainable or ethical investments isn’t always the best decision. So what are the options for people who want to green their pension?
Paul Dunne, head of client management and distribution at State Street Global Advisors Ireland, says that, in general, asset managers have noticed a growing demand for investment strategies that integrate ESG interests, but he notes that it varies considerably from client to client. “Schemes with a younger membership are more likely to make these requests, while it is a little less likely - but still happening - in those with an older demographic and more advanced careers” says Dunne. Ethical investments are less of a consideration, but Dunne notes that major geopolitical events - such as the Russian invasion of Ukraine - can trigger requests from investors keen to ensure they aren’t supporting the protagonists.
“When something is very topical within the media we tend to get members and trustees asking the question. We see people keen to remain informed about the underlying holdings of funds that we manage more and more.”
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According to Shane O’Farrell, director of products at Irish Life Corporate Business, this is linked to the increasing trend towards more sustainable investments across Europe seen in the last five years or so. “This has cascaded down from corporates to institutional investors such as pension plan trustees and now even to individuals, whether they are pension plan members or retail savers,” he says. “This also tallies with our own market research in Irish Life, which suggests that over 80 per cent of pension plan members would save more if they knew it would help the planet.”
This has all translated into a steady flow of inquiries from people wondering what exactly their pension is invested in. “The questions we are asked really reflect the dramatic increase that we are seeing in awareness around this issue, but also quite pivotally, in the level of understanding and knowledge that people now have in this area,” says O’Farrell. “So questions now take the line of ‘how are climate risks managed within this fund?’ or ‘does the fund have increased exposure to companies providing goods and services which promote sustainability?’.” To this end, Irish Life recently developed a carbon impact calculator, which allows people to input their fund value and view the impact that their own individual investments are having in reducing carbon emissions in terms of real-world terms such as light bulb hours, daily commutes or litres of petrol. “That’s a really powerful thing to be able to put into people’s hands,” says O’Farrell.
The regulatory environment has also transformed, says Robert Meaney, responsible investment lead for Mercer Ireland. “We’ve had IORP II but there are new EU regulations coming in almost every year, which helps to put increased pressure on funds but also advisors to make sure that the broader sustainability agenda is part of how funds operate and also how they report to scheme members.”
While the passion to go green is laudable, financial advisors also caution that it may impact the performance of their pension.
Meaney says that while the majority of pension scheme members will go with the default “middle of the road” investment option, which is typically low or medium risk in terms of its diversification and exposure, choosing to invest purely in ESG investments can be a risky strategy.
“People need to be careful that while members move themselves to a fund they see as more green, they may then open themselves up to more risks,” Meaney explains. “Often those funds can be just invested in one asset class, which increases risk. It might just be an equity fund, for example, whereas the default option would be more diversified.
“Many people will have gone into the default but there are always other fund options and increasingly you are seeing a more sustainable focused fund within that choice, this allows members to be more explicit in terms of how they are investing.”
Dunne also issues a word of caution. “Schemes can engage in selective disinvestment from certain sectors but again that introduces risk,” he says. “We would advise on whether it is in the best interests of the underlying members.”
However, asset managers are also devising greener default options. Meaney says that Mercer has worked hard to put its default strategy on a path to net zero. “We have aligned it with the Paris Agreement and the broader commitments to reduce carbon over time so in that sense a lot of members may not even be aware but their pension will be on this path too. Uniquely, the funds are diversified across a lot of different asset classes so members aren’t exposed.”
“Responsibly managed funds now account for around 40 per cent of Irish Life Investment Managers’ total assets,” notes O’Farrell. “To put that in context, this figure was under 20 per cent just three years ago, so there has been some incredible progress here in a relatively short time.” Irish Life also recently developed a bespoke Climate Focused Fund for a large institution seeking to completely eliminate fossil fuels from their endowment portfolio, he adds.
Pensions funds are also naturally becoming greener as organisations evolve to become more sustainable, Dunne points out. “Many companies have made net-zero pledges anyway and are therefore transitioning to less carbon-intensive operations - that is across industry,” he says. “Pension investments therefore have an improved climate profile naturally without anything explicit happening.”
Asset stewardship, whereby investors engage with companies on their sustainable credentials - or lack thereof -, is also hugely effective. According to Dunne: ‘We see it as our responsibility to consider elements that impact long-term value creation and that includes sustainability. Engagement is a vital tool to get these companies to do better.”
“We see stewardship as having a huge role to play,” Meaney adds. “For example, some of the oil companies have emerged with their own commitments to net zero and much of this has been due to the underlying investors demanding this at the board meetings.”
But what if you still want to ensure your pension is as green as it can be? O’Farrell says there are basic questions you can ask. “When thinking about ‘green’ options, people should ask: ‘Am I currently invested in a fund which promotes environmental or social characteristics and which incorporates ESG data and sustainability into the investment process?’” He adds that article 8/9 is the designation given at EU level for “green” or responsibly invested fund options and a majority of pension schemes or retail platforms in Ireland will offer a range of these solutions.