Many of us would like to be more sustainable. There are various ways to do this, from eating less red meat to turning your thermostat down. One often forgotten way is to invest more into green and sustainable products e.g. via your pension or ISA. Throughout this blogI have used the term Environmental, Social and Corporate Governance (ESG) as a catch-all way to describe anything green or sustainable.

This article aims to help you answer these questions:

• Is ESG already incorporated within my existing investments?
• How can I incorporate more ESG into my investments?
• What are the challenges of incorporating ESG into my investments?

Working out whether ESG is already incorporated in your existing investments and how to add more

Fortunately, in recent years, due to a range of new regulations, asset managers who are responsible for investing on your behalf have generally become more focused on ESG and reporting on their stewardship activities. To find out more about what your investment manager is doing, Google your asset manager’s name and ‘ESG’, ‘voting’ or ‘engagement’.

The non-profit organisation ShareAction regularly ranks asset managers on their voting activities. This can be useful in comparing their stewardship efforts.

For most people the largest asset after their home is their pension. Below are some specific ways you can find out more about how ESG is incorporated into your pension, depending on what type of pension scheme it is.

Defined Benefit Pension (Final Salary)

This was once a common form of pension, however, most schemes are closed. You can normally find your pension provider’s ESG policy by doing a Google search of your pension scheme name and ‘ESG Policy’ or it could be within the ‘Statement of Investment Principles’.

To find out how your pension provider follows its ESG policy you can Google your pension scheme name and ‘Implementation Statement’. Sometimes it is tricky to find but it will be in the ‘Annual Report and Accounts’ document. This will detail what the pension scheme believes are most significant ESG actions of its asset managers.

The quality of the Implementation Statement varies depending how much money the pension provider pays for reporting on their ESG efforts, so some will have little information. A Google search of your pension scheme name and ‘ESG’ may bring up more information.

Ways to incorporate more ESG:

In Defined Benefit (Final Salary) pensions, employers are responsible for paying members’ pensions, so there is less a member can do to make their pension incorporate more ESG. However, due to recent regulations, all pension schemes will incorporate ESG factors and requirements are increasing.

Defined Contribution

The most common type of Pension. Defined Contribution pensions have similar reporting requirements to Defined Benefit (Final Salary) ones, so following the same search procedures listed above will work.

Ways to incorporate more ESG:

Defined Contribution pensions have a default fund, which members automatically get invested into. The default fund will have elements of ESG considered. The largest provider is National Employment Savings Trust (Nest), which was set up by the government. In 2021 they invested into a solar farm in Reading, which consisted of 60,000 panels and can power more than 5,000 homes. This highlights how pensions schemes are actively pursuing ESG investments that benefits Reading.

Increasing your allocation to ESG assets depends on the range of other investment funds available from your provider. That means moving from the default fund to ‘self-select funds’, which you chose. However, the range of alternative solutions can be low, e.g. Nest only offers two ESG alternatives and great care needs to be taken to find the right solution.

Self-Invested Personal Pension or ISA

In these cases you have total control to choose which assets you want to invest in. You can search for funds labelled ‘responsible’, ‘green’, ‘ethical’ or ‘ESG’ to find the range your provider offers. Fortunately, there in an increasing number of new funds and solutions available.

Challenges of incorporating ESG within your investments

It is important to know the challenges of incorporating ESG, as it can have a material impact on your wealth and quality of retirement. Below are some suggestions to consider:

• Putting money into a ‘green’ investment or ‘good’ company does not automatically equal a successful investment. Remember, purchase price matters. You can overpay, which will lead to poor performance. For example, at one point the electric car manufacturer Tesla was valued at more than almost all other large automobile companies combined. Since its share price peaked in 2021 lost around 70% at one point.
• Many ESG investments have benefits such as a lower carbon footprint. This can be achieved by excluding some sectors, e.g. oil, and allocating more to cleaner industries such as technology. There will be times when this exposure leads to losses, e.g. in 2022 the share price of oil company BP increased by around 45%, while Facebook (Meta) lost 65%. Investors should understand the implications and risks of their investments.
• If you decide to withdraw your money from high carbon emitting companies, e.g. oil firms, remember that someone else will buy the stock you are selling. It is often better to hold onto the stock and engage with the company to encourage them to bring about real-world positive change. Fortunately, many asset managers already do this through shareholder voting and engagement with company management.

Taking a considered approach

It can be a challenge to incorporate more ESG factors into your investments, but the range of solutions available is growing.

It’s highly likely that ESG is already incorporated within your existing investments and a Google search with the right terms can provide more information. Asset managers have significantly improved their ESG reporting in recent years due to various new regulations and pressure from investors. However, they could still do more to enhance their stewardship activities.

Including more ESG in your investments is getting easier but remember that, when handling investments in less ethical brands, asset managers are in a strong position to engage with the businesses behind them and encourage them to make changes.

Please note that this blog post does not constitute investment advice.