Scottish Widows To Divest Pension Fund Holdings That Fail Sustainability Criteria

Scottish Widows, one of the UK’s largest pensions companies, has begun the process of divesting £440 million worth of investments it says fail to meet its sustainability criteria. The pension and insurance funds manager introduced new, stricter environmental, social and governance standards that the companies and assets its fund managers invest in are obliged to meet. It will now begin to sell off those that have not, in the eyes of Scottish Widows, moved to comply with its sustainability standards.

Scottish Widows’ sustainable investment strategy considers companies that do not meet its environmental, social and governance standards as representing a long-term investment risk. The £440 million of assets to be divested are those the pensions provider now consider “the most severe investment risk”.

The company has also warned that the current list of assets confirmed for divestment could grow “much further”, if the boards of other companies its funds hold stakes in do not quickly take action to set their business practises on a more sustainable footing.

The strict position being taken by Scottish Widows highlights a growing trend of large fund managers in control of billions of general investment, pensions and insurance funds pressurising companies to take climate change and social responsibility more seriously. Blackrock, the giant U.S. fund manager that is the world’s largest, recently moved to exclude coal companies that don’t meet strict criteria from its funds.

Norges Bank, which manages the trillion-dollar Norwegian sovereign fund whose wealth is generated from the Scandinavian country’s oil revenues, recently sold off large holdings in London-listed miners Anglo American and Glencore. The holdings were divested because of the miners’ involvement in coal mining. Aberdeen Standard Investments took the decision to sell off most of its stake in online fast fashion retailer Boohoo over the summer after reports of poor and illegal working conditions in its supply chain.

Scottish Widows, first established over two centuries ago as an insurance company that would provide an income to the wives of soldiers who died in the Napoleonic Wars, is today part of the Lloyds Banking Group. It manages over £140 billion in pension, insurance and general investments made by around six million customers.

The company introduced new sustainability policies that restricted its fund managers from investing in any company that generates more than 10% of its revenue from thermal coal mining or tar sands. It will also no longer invest in companies manufacturing certain weapons, such as landmines or chemical bombs. It also requires the companies it invests in to meet United Nations’ standards on human rights, corruption and environmental responsibility.

Even Scottish Widows tracker funds, which are designed to follow general stock market or sector indices, will exclude the shares of blacklisted companies who form part of an index. That will mean that trackers may in future show some divergence from the index being followed, if it contains any significant weighting towards blacklisted stocks.

On announcing its divestment decision, Scottish Widows declared its new approach as “the most far reaching”, of any major pensions provider. Exactly which companies the holdings being divested are held in will not be announced for now as the asset manager is still in the process of executing the trades.

Scottish Widows’ decision is being promoted as something the financial services company hopes will “make a real difference”, by financially punishing unsustainable business operations. But there is a hard-nosed financial element to the divestments as well. As explained by Maria Nazarova-Doyle, the company’s head of pension investments:

“The growth of these ‘at risk’ companies is likely to be severely limited by future regulations and the changing views of customers and investors, leading to significant falls in their share prices. As a large institutional investor, we have a vital role to play in shielding our customers from ESG investment risks, as well as influencing positive change through the investments we hold.”

Scottish Widows’ fund managers will be given six months to adjust their portfolios to exclude blacklisted holdings. However, there may be exceptions where the asset manager has enough influence to pressure companies that do not meet its sustainability guidelines into adjusting their business models to do so. Scottish Widows fund managers who do not adjust their portfolios by the end of the six-month deadline face the prospect of being either fined or even having their contracts terminated.