How green is my pension? Retirement funds reflect ESG investing shift

Shane O’Farrell, director of corporate partnerships, Irish Life Corporate Business, recognises that consumers are becoming more environmentally conscious regarding their pensions.

“We have run a series of environmental, social and governance (ESG) focused awareness campaigns and the uptake has been phenomenal,” says O’Farrell.

“When you look at the data around those who clicked through to learn more, you might expect the younger demographics to be significantly more aligned to this type of messaging. But we actually found that those over 50 were almost twice as likely to open the communications than their 30-39-year-old counterparts, though those under 30 placed somewhere in between.”

An Irish Life initiative designed to give its online pension portal users insight into how it furthers the ESG agenda is at the testing stage, O’Farrell adds.

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“It also gives them a chance to share feedback on this activity, with a view to shaping what we do in this space going forward,” he says.

Ciaran Casey, chief commercial officer at AIB Life, agrees that ESG concerns are becoming more important.

“We know from global market trends that there is a shift to and focus on ESG investing across all demographics,” says Casey. “At AIB Life we offer a range of funds including both Article 8 and Article 9 [of the EU’s Sustainable Finance Disclosure Regulation] funds for our environmentally conscious customers.

“These options are available through our multi-asset offerings and on a stand-alone basis. We want to support customers from all demographics who want access to more environmentally conscious pension and investment options.”

Consumers can assess the sustainability of their pension with reference to the Sustainable Finance Disclosure Regulation (SFDR), which requires providers to make specific disclosures to aid clear understanding.

Funds must be classified into one of three categories under SFDR:

Article 6 – Funds that do not promote an environmental or social objective or characteristics

Article 8 – Funds that promote environmental or social characteristics

Article 9 – Funds that have sustainable investment as their objective

The regulation also requires that pre-contractual disclosures are provided to consumers for any Article 8 or 9 funds they choose before they enter into a pension contract.

O’Farrell says there is a misconception that going green on investments means giving up some returns.

“This is not the case; they are not mutually exclusive,” he says. “Some investment managers have spent a lot of time and resources researching how to build investment funds that deliver a high standard of ESG while delivering similar long-term returns if the ESG elements were not adopted, particularly when it comes to Article 8 funds with dual-weighted returns and ESG objectives.

“While there are some, the level of exclusions of securities is modest and, instead, more focus is placed on giving a little more to companies with good ESG scores and a little bit less to companies with poor ESG scores. In addition, engagement with companies around ESG topics should have a good impact.”

There are cases of companies that have transitioned their activities away from fossil fuels toward greener activities such as renewable energy. Many of the large oil companies, for example, are investing heavily in renewable energy and transitioning their energy mix to a higher proportion of renewables, coupled with increasing exposure to less carbon-intensive fossil fuels such as liquefied natural gas. But it will take time to change the energy system to low carbon.

Casey points out that AIB Life funds are subject to a stewardship programme which includes engaging with companies on matters including climate, the environment and diversity.

“The stewardship programme also includes a proxy-voting policy which addresses governance issues, including executive pay, board independence and diversity, and climate/environmental considerations,” he adds.

Greenwashing is definitely something to watch out for. The SFDR classification system helps in this regard and regulators in other EU countries have compelled investment managers to reclassify their funds for overstating their classification versus their underlying investment strategy.

Where consumers are saving into pensions via their employers, chances are the trustees are being advised, so good governance here will help to avoid greenwashing.

O’Farrell says Article 9 funds that prioritise ESG objectives are definitely more concentrated, sometimes involving only 50 or so companies, versus the many thousands that would typically be the case.

“We haven’t seen too many extreme, exotic green funds being offered in Ireland yet but there is no doubt they are available in other parts of the world, so it is only a matter of time before they are available here,” he says.

“One of the most common types of funds in this space are green bond funds, where the fund invests in bonds designed to support specific climate-related or environmental projects.”

Another Irish expert, Marc Aboud, ESG risk and regulation lead at Deloitte, points to strong European Insurance and Occupational Pensions Authority (EIOPA) guidelines to keep everything in check.

“Given the long-term nature of pensions, the physical and transition risks as a result of climate change should be considered as part of a pension to ensure that the underlying assets or funds are not susceptible to these risks over the long term and are being managed,” says Aboud.

“Numerous regulations, such as the Institutions for Occupational Retirement Provision (IORP) II Directive, requires that IORPs explicitly disclose where ESG factors are considered in investment decisions and how they form part of their risk management system.

“The EIOPA published a number of opinions relating to the issues of governance and risk assessment of ESG factors by IORP.”