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How green is your pension?

Workers seek superannuation that matches environment, social and governance ethics

"I don't think a green pension exists currently. What does exist is more and more choice and it's only going to expand," says Rob Meaney, the responsible investment lead for Mercer Ireland.

Aside from not investing in companies that are seen as polluting or involved in the fossil fuel space, there is an active choice to look at companies operating in the green space. These new choices can also come with higher risk.

“These new asset classes are typically new companies with the potential for growth, but as new companies they are also subject to greater risk than established companies.”

Meaney points out that, as with all investing, diversification and risk analysis is key to creating the right balance for clients.

“We would expect a lot of those companies in the sustainable space to do well over the next 10 years or so, but there will be winners and losers as always. We are cautious about placing all your eggs in one basket.”

New regulations from the EU – like the Sustainable Finance Disclosure Regulation (SFDR) – are pushing all companies to become more sustainable. This fund classification system, in particular articles eight and nine, identifies sustainable funds that can be classified as green. Many funds are actively moving in this direction to follow the available money.

“This will take time and included in that are some big fossil fuel companies that are spending vast sums to become more renewable, either through purchasing existing companies or directing R&D into sustainable activities.

“This will be interesting as there is the potential for a company currently considered a big polluter today to have moved into the sustainable, more environmentally focused space over the next 10 years. And they could perform really well.”

Financial wellbeing

Long-term investing has to take into account which companies will successfully migrate to this new classification. And established mature fossil fuel companies have deep pockets.

Bernard Walsh, head of pensions with Bank of Ireland, has taken the lead in recent years in promoting financial wellbeing and has found that the pull is as important as the push.

“Only today, I had an in-person meeting with a successful businessman in his early 40s. His number-one criterion was that all of his investment was to be in the environment, social and governance [ESG)]space,” he says. “All of it.”

Part of Walsh’s role is in education. He finds that while awareness of the E comes first, there is new emphasis on the S and the G.

“Back 20 or 30 years ago, there used to be what was called socially responsible investment or ethical funds. These were often driven by religious organisations or not for profits and tended to exclude things like tobacco, alcohol and anything to do with armaments. These have morphed into the SG components.”

Bank of Ireland has undertaken a lot of research in this area, including a recent report on ESG and investing from December 2020. While overall awareness is low in the over-50s, the younger generation is much more clued in, with 18 to 35 year olds and Dublin residents exhibiting strongest interest.

One thing the research picked up is that people felt that ESG investments would cost more and deliver lower returns.

Higher standards

“And yes, the specialist nature of these funds may result in higher research costs but they have more than justified these fees by the returns.”

Another aspect is that companies that adhere to higher standards of governance also perform better, avoiding pitfalls, scandals and other detrimental corporate events.

Walsh agrees with Meaney about looking long term at investments. “Today’s polluter may strategically move to tomorrow’s model of ESG practice. And we as the managers of investment funds can hold companies to account and make a difference.”

Stewardship is a core principle, says Alistair Byrne, head of retirement strategy at State Street. It goes beyond merely looking at excluding certain investments or even adding new ones.

“What I mean is the engagement we have with companies over their environmental, social and governance practices. We work to positively influence those companies. And if they’ve got practices that we don’t like, within their supply chain for example, or the way they manage their workforce, we can influence them to change their practices.

Stewardship focus

“One way is by voting – we have votes attached to the shares. If we are unhappy with the direction of a company, we might decide to vote against or for a particular resolution. If we feel management is not taking certain issues seriously enough or are not making the level of progress that we expect, then we can vote against directors and fight against their re-election.”

This focus on stewardship goes far beyond excluding a company on ESG grounds and positively impacts outcomes. Part of this work was formalised by State Street bank to focus on increasing diversity on boards. The campaign, Fearless Girl, takes its name from the famous Wall Street statue recently relocated to the front of the Stock Exchange.

“There are hundreds of boards, if not thousands, around the world without female representation,” Byrne says.

“We engaged with these companies, and we are very happy to say we are making a difference and the numbers of women on boards is improving.”

Which brings Byrne back to his point about stewardship. “It is easy to exclude but it is far more impactful to help companies change. At the end of the day, we won’t have to call investments ESG-compliant because they will all be turned in that direction.”

Barry McCall

Barry McCall is a contributor to The Irish Times