Looking to make a move towards responsible investing but not sure where to begin? Gareth Trainor, Head of Investment Solutions at Standard Life, covers what you need to know.
It’s the start of a new year, which means some of us are considering setting our resolutions and intentions for the year ahead. Something many of us feel passionate about doing this year is making sure the investments in our pensions are doing good. Not just for our future, but for the planet too. But in a world of jargon, greenwashing and a lot of choice, it can be hard to know where to begin.
Looking for answers, we spoke to Gareth Trainor, Head of Investment Solutions at Standard Life, to find out more about investing responsibly. From explaining the jargon to tips for reviewing your pension investments – here’s what you need to know.
You may have seen terms such as sustainable, ethical, impact, and environmental, social and governance (ESG). Well responsible investment is really an umbrella term for all these approaches and more.
To keep it simple, it’s helpful to focus in on ESG as it’s probably the one that’s the most descriptive and easy to understand. It breaks it down into three main categories that help capture the essence of what responsible investing actually is. There’s a huge amount of focus on climate at the moment, quite rightly, which is your ‘environmental’. But there’s also a lot to consider from a social and governance perspective – which is the ‘S’ and the ‘G’.
An investment manager can look closely at a company’s impact on land, sea, air, wildlife, plant life and the climate. They might consider things like how much energy a company uses, waste disposal, land development and carbon footprint.
An investment manager can review a company’s relationship with its employees, suppliers and the community where it operates. They might consider things like labour practices, human rights, employee wellbeing, health schemes for staff and supplier relationships.
An investment manager can look at the issues that might affect a company’s management and processes. They might consider things like who’s running the company, how the company and its finances are managed, and how it approaches salaries and strategy.
The example I use over and over again is: it’s pointless investing in a wind farm manufacturer and patting yourself on the back if its production methods pollute local rivers, it uses forced cheap labour and it’s not open to improving its standards. To support real change – and to help manage the risks your savings are exposed to – it’s important to take the ‘E’, the ‘S’ and the ‘G’ into account when you’re investing.
There’s a couple of different ways of thinking about it. You can pick a fund or default solution that actually does it all for you and clearly incorporates the different ESG approaches. This is where investment experts will choose and manage the funds for you. At Standard Life, for instance, our default investment option for new customers primarily aims to improve pension pot returns over the long term, but it also has a clear strategy to invest responsibly.
Your other option is to pick individual funds that will target specific ethical, environmental and social goals alongside aiming for growth over the long term. So say you want to focus in on gender diversity or sustainable water sources, there are standalone funds that have specific strategies for those things as well.
You’ve got to be honest with yourself about what type of investor you are to begin with. Are you somebody who wants to delegate the decisions to somebody else? Or do you want to be hands-on and drive it yourself?
If you want to self-select your own funds and you’re happy with the fact that you’re taking that on your own shoulders and can review them yourself, great. But you need to make sure you have the knowledge, time and ability to really commit to this. And always remember the importance of making sure your investments are diversified.
If you’re someone who is looking for a ready-made solution, you should think about looking for one that moves you into lower-risk investments as you approach retirement and is provided by a company you trust. And it’s a good idea to consider a solution that either is currently sustainable or is moving to become sustainable. I think the vast majority of solutions will move in this direction anyway. So it’s just a case of if it isn’t there today, is it moving? If it is moving, fine. If it isn’t then that’s when you might want to contact your provider and ask what they’re doing about it.
You should speak to a financial adviser before making any decisions about your pension investments. There is likely to be a charge for any advice you receive.
People use the word greenwashing a lot and in essence what we’re saying is people are making sustainability claims that aren’t actually factually true.
On one hand many companies are scrambling to do the right thing, which is great. But on the other, it means that some are overstating what they’re doing or potentially making claims that aren’t necessarily backed by their actions.
However the pensions industry is very much focused on helping to address the huge sustainability issues we all face. Pressure is mounting for companies to be more transparent about exactly what they’re doing. So it’s vital that investment managers and providers have substance behind any ESG claims, and ensure that a consistent and transparent approach is put in place. I think we’re going to see an improvement on this as we go.
I would encourage people to be more inquisitive about their pension provider. The reality is most people aren’t investment experts and are going to go into defaults or the solutions made available by their employers. And then it’s really a case of asking what is that provider doing on my behalf and is it enough for what I want to see happening?
Find out more about what we’re doing at Standard Life to contribute to a more sustainable future.
The key thing for me is to take a step back and remember why you’re investing in the first place, remember what type of investor you are, and then make decisions according to that.
Your priority should be aiming for a good outcome. And a good outcome isn’t just investing according to your values; it’s about trying to make sure you end up with enough for the future you want too.
Make sure you’re comfortable with the investments you’ve chosen from a risk and return perspective, as well as from a responsible investing perspective. You’ve got to be thinking about both with a cool head and get financial advice if you need it.
For more insights on responsible investing from Gareth, try Aim to grow your pension pot and do good - is it really possible? or Climate change and your pension pot - discover the link
Behind the scenes, your Standard Life pension plan is encouraging companies to do better. Find out how in Damian Irvine’s recent article.
Check out our Responsible Investment pages to see how we incorporate sustainability issues into our range of investment solutions.
You can find out more about Standard Life’s sustainability commitments here.
The information here is based on our understanding in January 2022 and shouldn’t be regarded as financial advice.
The value of investments can go down as well as up and may be worth less than what was paid in.