The pensions firm has begun the process of divesting £440m of its holdings in firms that it believes pose “the most severe investment risk”. Scottish Widows has warned that this figure could substantially grow if other boards do not make moves to improve their business practices.

The move is the latest evidence that the City of London is starting to take issues such as climate change more seriously. Fund manager Blackrock, has barred certain coal companies from its funds, while Norges Bank, recently sold its shares in Glencore and Anglo American, the large London-listed miners, because of their association with coal.

Over the summer Aberdeen Standard Investments dropped most of its stake in Boohoo after the fashion firm was reportedly mistreating some workers in the supply chain. 

Bank of Scotland owner Lloyds Banking Group took over Scottish Widows in 2009 and the firm now manages over £140 billion of savings and investments on behalf of its six million customers, The Times reports.

Under the new policy, Scottish Widows’ fund managers are banned from investing in companies that make more than 10% of their revenue from thermal coal and tar sands.

Its funds also will exclude arms manufacturers that make “controversial weapons”, such as landmines and chemical bombs, as well as businesses that fall short of the United Nations’ standards on areas such as human rights, corruption and the environment. Its popular tracker funds, which mirror the performance of a certain index or sector, similarly will be unable to include the blacklisted stocks.

The firm described its new policy as “the most far-reaching” of any leading pensions provider. However, Scottish Widows was unable to reveal which companies it was dropping since it was still in the process of executing the trades.

While Scottish Widows hopes the changes will help make substantial changes, there is a financial element to the decision too.

Maria Nazarova-Doyle, Scottish Widows’ head of pension investments, said: “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.”