Irish pensions to offer more sustainable investment

European legislation due to come into effect next year in Ireland will promote responsible pensions investment, as the Irish Times reported this week in an article by Aviva’s senior investment director, Shane O’Brien.

Under the proposed framework, financial advisers will need to ask clients about their environmental, social and corporate governance (ESG) preferences. People who indicate support will need to be provided with sustainable investment options.

To ensure the process is thorough, advisers must document their processes and show evidence why particular clients don’t choose sustainable investment options. Advisers must base decisions on not only what investment they think will make someone the most money but its environmental, social and corporate implications.

Dealings with the environment

An example of this, O’Brien writes, could be when looking at investment in stocks and shares, an adviser needs to consider the company’s dealings with the environment, its staff and local communities, and if it has diversity at board level.

This is likely to lead in more investment in firms such as wind farms, rather than coal companies.

The EU is also pushing for more investment managers to be clearer about what ‘sustainable’ means and the impact of sustainable investment. The new legislation means that if managers market a fund as being ESG-friendly, they must explain fully so investors can see if the features are being achieved.

Climate change goals

If a fund claims to have a specific sustainable outcome (such as climate change), then the manager must show how the investment will achieve this, and how it avoids anything that negatively impacts the climate.

At present, few people have little idea of where their pension fund is invested. Research undertaken by Aviva Life & Pensions Ireland last year, revealed that 80 per cent of respondents said they would choose an ESG investment over a non-ESG alternative when a clear explanation was provided.

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O’Brien says the introduction of legislation will “be a catalyst for financial advisers to have this conversation with their clients”.

From the investor’s perspective, he argues sustainable investment may help increase returns. The data provider Morningstar found that ESG funds have, on average, outperformed traditional funds.

The new legislation should lead to better pension policies returns, he says, and a better world for future generations.