Why account for ESG factors when deciding where to invest?

What is a responsible investment?

Global sustainability challenges such as climate change, inequality, modern slavery and regulatory pressures around these issues are introducing new risk factors for investors. In response, many have been re-evaluating traditional investment approaches.

ESG, or responsible investing, aims to grow investors’ money by making sure these non-financial factors are taken into account when investment decisions are made. These considerations are made in order to improve financial returns and reduce risks, which is coupled with harm minimisation as well.

This could mean, for example, excluding investment in tobacco products or coal. Stewardship, in contrast, is more about positive impact on companies to influence them to become more sustainable and responsible - and at Scottish Widows we do a lot of active stewardship. 

While the main incentives of an ESG-led approach to investing are financial, a great side-effect may be the positive impact that these investments have on society. This could be companies reducing their waste output, using cleaner energy sources, or improving their treatment of local stakeholders and communities. 

Is responsible investing the future?

On the face of it, coronavirus and climate change would appear to have little in common, but there has been one positive to come out of the pandemic – it’s made investors more aware of global risks, and the need to urgently confront them.

Markets are now identifying sustainable investment as a long-term theme, especially as the governmental push for net zero takes centre stage. This push will impact asset fundamentals and valuations, and will be a key consideration for investors in the coming years.

We’ve seen significant growth in sustainable funds over the past decade, which has likely been prompted by evidence that a business strategy which takes account of ESG issues tends to result in high-quality management and improved returns. Analysis by Bloomberg showed that global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management.²

There’s also evidence that consumers are increasingly interested in the impact their investments are having. This is reflected in data from Scottish Widows’ Retirement Report 2020 which showed that 61% of individual pension holders said it was important to them to have clearly labelled pension fund options that allow them to invest sustainably.³

The launch of our unique Find Your Impact (FYI) ESG feature within the Scottish Widows mobile app supports our customers looking to plan for a better future by showing them non-financial impacts of their pension, like carbon footprint, diversity and waste. 

As well as giving members information about where their money is invested, the FYI feature provides an opportunity for pension scheme members to voice their opinions. Through the Have Your Say polling functionality, members can share their opinion on the issues that really matter to them, not just  AGM-type questions but also sector-wide questions and topical thematic issues. Their views are fed into the development of our stewardship strategy. 

Scottish Widows plans to continue to meet this growing sustainable investment need, and to achieve net zero by 2050. We believe that this will offer longer-term sustainable growth for customers’ pension savings by leveraging low-carbon transition opportunities among some of the world’s most forward-looking companies. 

The pensions industry as a whole controls trillions of pounds worth of investments, and we believe that it has an obligation to act as a responsible steward for the success of climate solutions – and to exclude investments in high carbon companies which are resistant to change.

Do responsible investments have a lower return than traditional investments?

A common myth against investing in assets with ESG criteria has been that they may not achieve the same high returns, but plenty of research and financial analysis has proven that the opposite is the case. Research by Morningstar showed that a majority of sustainable funds that existed 10 years ago which  have survived through to the present, outperformed their average comparable surviving traditional fund.

The study showed higher success rates for sustainable funds over one, three, five and 10 year periods, indicating that investors backing the ESG route were less likely to miss out on returns than if they had invested in traditional funds. Over the 10-year period through 2019, 58.8% of sustainable funds across the seven categories considered beat their average traditional peer. 4

At Scottish Widows, our first responsibility is always to our customers and ensuring we are looking after their investments for the long‐term. Moving to net zero will help protect savings against climate‐related risks and uncertainty, and offer longer‐term sustainable growth by accessing low carbon transition opportunities.

61%

of pension holders said it was important to them to have clearly labelled pension fund options that allow them to invest sustainably.

How are Scottish Widows helping to improve the ESG credentials of their investments?

We’ve set ourselves an ambitious goal to decarbonise all our investments by 2050, backing climate solutions and using our engagement and shareholder voting power to drive companies to make the changes necessary within this timescale.

To help drive this change, we’ve launched our Climate Action Plan, becoming the first major pensions and insurance provider to clearly define its long-term strategy for achieving its decarbonisation targets and a net-zero portfolio by 2050.

The Climate Action Plan includes the commitments to:

• Invest £20-25 billion into climate-aware investment strategies and climate solutions investments by 2025. Of this, £1 billion will be specifically invested in climate solutions such as renewable energy, low carbon buildings, and energy efficient technologies
• Ensure climate impacts are at the core of asset allocation decision-making
• Exclude high carbon investments that are at high risk of becoming stranded assets
• Focus stewardship activity on companies failing to address climate change risks

We’ve invested £5 billion in Blackrock’s Climate Transition World Equity Fund, which has a bias towards firms with improved climate credentials to ensure that pension savers reap the benefits of a blooming low-carbon economy. 

We’ve also tightened our divestment rules on businesses deriving revenues from sectors like fossil fuels and tobacco, divesting c.£3 billion from companies who do not meet our ESG investment criteria. This makes it one of the most extensive screening policies yet implemented by a UK pensions provider. 

It’s also important to have shorter-term milestones. We only have a small window to radically reduce emissions – that window closes around 2030. As IPCC research has shown, if we want to hold the line to 1.5°C of pre-industrial levels, we have to cut emissions by approximately 50% by 2030. After that, all signs point to greater levels of greenhouse gases starting a domino effect of climate risks. 

So our short-term target is to halve the carbon footprint of all our investments by 2030. By 2025, we’ll also have invested billions of pounds in climate-aware strategies and climate solutions such as renewable energy, low-carbon buildings, and energy-efficient technologies. This is a complex undertaking for a provider of our size, but we believe it’s essential to set clear milestones to enable us to achieve the 2050 goal.
 

More control over finances and a lower carbon footprint

When it comes to investing, starting early is key. It’s vital to get more people active in the investment sphere so that those with pensions have a greater say when it comes to aligning their money with their values. As we’ve seen, for many people this means finding funds that focus on greener, low-carbon initiatives. 

We look forward to other providers joining us and helping set out how the UK pensions industry will achieve large-scale net zero commitments, setting a clear expectation for high-carbon sectors resistant to change. Together, we can safeguard the future of our customers’ pension savings – and our planet.

References

1 Make my money matter

2 Bloomberg Intelligence article (2021): ‘ESG assets may hit £53 trillion by 2025, a third of global AUM’.

3 Responsible Investment – 2020 Retirement Report (scottishwidows.co.uk)

4 Do Sustainable Funds Beat their Rivals? | Morningstar