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Why ESG ‘misunderstanding’ is a barrier to adoption

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Investors are being discouraged from considering environmental, social and corporate governance (ESG) factors by a misunderstanding of what ESG means, according to the chief investment officer of one of the UK’s largest auto-enrolment pension schemes.

Some of those involved in the debate were focusing on ethics rather than investment when discussing ESG issues, creating a barrier to adoption, said Nico Aspinall, chief investment officer at the People’s Pension.

“A lot of people discussing ESG are still talking about ethics, not investment,” Aspinall said in an interview for a Pensions Policy Institute (PPI) report. 

Jargon was abundant, which was confusing those trying to get to grips with the issues, he added.

“There are two worlds between institutional investment and [the] green lobby, and they risk speaking different languages,” the CIO said. “This is getting better, but there needs to be more bridge builders who can bring both groups together.”

The institute’s report – written by its head of policy research Daniela Silcock – noted that there was confusion among trustees, independent governance committees, advisers and investment managers as to the purpose and definition of ESG.

“Proponents generally agree that ESG is a confusing shorthand and does not necessarily reflect the philosophy behind the practice,” the report said.

Another barrier to the consideration of ESG factors, according to the report, was the low level of involvement that pension scheme providers had with investment decisions.

Almost all schemes invested in pooled funds or used third-party investment managers to make day-to-day investment decisions, but the extent to which ESG factors were taken into account varied between fund managers and it was difficult for trustees to distinguish between approaches, the report said.

Many fund managers offered “ethical funds” to defined contribution (DC) scheme members, it added, but these would require people to make an active choice, generally at a higher cost than the default option.

The importance of control

The People’s Pension – a £5bn (€5.6bn) master trust scheme run by a not-for-profit organisation, B&CE – was moving towards taking more control of how it approached ESG, Aspinall said.

Under its current approach, he said, the master trust did not have direct control of how investment managers voted and engaged on behalf of the pension scheme, “which means we compromise with other investors on issues and what actions to take”.

“We want to do more here,” said the CIO.

In another interview for the PPI report, Faith Ward, chief responsible investment officer at £30bn Brunel Pension Partnership, one of the UK’s new local government pension scheme asset pools, said advisers and managers were often “not fully informed about ESG, and they misadvise clients”.

“Trustees and advisers need to be fully equipped to understand the relevance of potential ESG issues,” added Ward.

The PPI report was sponsored by Redington. According to Lydia Fearn, head of DC and financial wellbeing at the investment consultancy, it did so because “it can sometimes feel that there are more questions than answers when it comes to ESG”.

The PPI report can be found here.

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