What is holding ESG, sustainable and responsible investing back?

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The 2021 United Nations Climate Change Conference (COP26) may have put environmental, social and governance (ESG) on the agenda, but it still has a long way to go before it becomes a mainstream strategy in the UK retail investment world.

Aegon surveyed 10,000 Brits and found over half (55%) aren’t aware of or don’t understand the terms ‘responsible investment’, ‘sustainable investment’ or ‘ESG investing’.

But figures do show that ESG issues are of increasing importance for the majority, with nearly three-quarters (72%) concerned about environmental issues, 61% worrying about equality, and 65% having concerns about poor corporate governance practice.

Hilkka Komulainen, head of responsible investment at Aegon UK, said: “COP26 did a good job of raising awareness of sustainability issues but we need to educate and bring attitudes towards responsible pension saving in line with people’s behaviour in other areas.”

Eliminate jargon

International Adviser reached out to a number of firms in the industry to discuss how the investment sector can help ESG thrive – and increase awareness around the strategy.

Jason Hollands, managing director of corporate affairs at Tilney, said: “People get bamboozled by the smorgasbord of jargon and it just turns them off from something where there is much greater latent demand than is being currently tapped into.

“During my time working in the asset and wealth management sector, it has variously been dubbed ethical investing, socially responsible investment (SRI), governance and sustainable investment (GSI) and the latest buzzwords are ESG, sustainable and responsible investing.

“I’m not a fan of pushing acronyms at the public and would really like to see some commonality in approach to help deliver greater understanding. In my view, sustainable investing at least indicates a strategy is cognisant of its environmental impact, while responsible investing captures wider issues around social impacts and being strong stewards of capital.”

Lewis Hamm, co-founder and chief executive at O-IM, said: “We fully recognise the importance ESG considerations are now playing in clients’ investments decisions and agree that it can be a minefield.

“This is part driven by greenwashing, where companies or funds label themselves as ESG and publish strong marketing materials for sustainability but can never be a true socially responsible investment, for example as an oil company.”

Definitions

Steve Kenny, chief distribution officer, Square Mile Investment Consulting and Research, said: The industry faces a major challenge in that we are all using different terms to describe the same thing. It is therefore imperative that we distinguish a common set of terms which can be adopted across the industry in order for the consumer to understand what we are talking about.

“It also further underlines the importance of the industry’s role in educating consumers to enable them to make the most informed investment decision.”

Laura Suter, head of personal finance at AJ Bell, said: “The ESG space is a classic one where the industry uses a bewildering array of jargon and acronyms, meaning it’s not surprising that lots of investors don’t understand what ESG stands for or what some of the terms mean.

“But it’s also a tricky area because ‘responsible’ investing means different things to different people. In the same way as one person thinks living responsibly is using the car a bit less and having reusable bags for the supermarket, while another person may decide to be entirely vegan and never fly on a plane again. So too responsible investing can mean different things to different people – there’s no one clear definition.”

Pensions

The Aegon survey also found only 9% think of their pension savings as a way of supporting a more sustainable and inclusive society.

A significant number of those surveyed don’t understand or identify with the role that their savings can play in supporting a more sustainable world.

While 13% said most of their investments follow a sustainable mandate, half of those asked didn’t know how much exposure they have to these sorts of funds.

Sarah Pennells, consumer finance specialist at Royal London, said: “While it’s great to see so many people concerned about environmental issues, it’s clear that many people are still unaware of the power of their pension.

“As pension providers, we have a huge opportunity to help consumers to bridge the knowledge gap around responsible and sustainable investment, and the options that are available to pension savers that can make a real difference. From helping reduce emissions to promoting diversity, pensions can be invested to support individuals in retirement whilst helping us all move towards a more sustainable world.

“It’s vital that we help people to make the connection between how their pension is invested and the world they may eventually retire into. Having a decent sized pension pot doesn’t mean they’ll have a good standard of living in retirement if the effects of climate change mean that, for example, their home is at increased risk of flooding, or the summers become so hot it’s hard for them to keep their home cool.”