Pensions have power: a guide to greener investing

If you want to do your bit to help combat climate change, one of the first places to look is your pension.

Research by Make My Money Matter, Aviva and Route 2 found that opting for a ‘green’ pension is over 20 times more effective in cutting your carbon footprint than giving up flying or giving up meat.

That stands to reason because, according to Price Waterhouse Cooper’s Pension funding index, the total asset value of UK pensions stood at £1.8 trillion late last year.

The sheer size of that investment pool makes pensions powerful. If those funds were channelled towards sustainable businesses and sectors, they could do a huge amount of good.

Investor-led change

So how do you make your own pension greener?

The first thing to remember is that, while your pension can help create a more sustainable world, at the moment the opposite may well be true.

Traditional pension funds tend to invest in the businesses and sectors likely to generate the best financial return, based on the criteria of the fund. Whether they’re sustainable or not isn’t necessarily part of the equation.

But things are beginning to change. Government research found that 68% of UK savers want their investments to prioritise people and planet alongside profit. Nearly half (44%) of us would switch to a green pension if we were offered one. Investors are demanding a shift to greener, more sustainable pensions.

More choice

For that reason, choosing a more environmentally friendly pension option is getting easier all the time.

A swathe of new pension products have come to market that have net zero carbon emission targets, while others have committed to stopping investing in the most polluting companies. Some funds are focused on causes like reforestation, sustainable transport and clean energy.

And it’s not just about climate change. Other funds focus on promoting human rights or better access to healthcare and education.

Pressure from regulators

To some extent investors are forcing this change, but it is also being pushed by governments and regulators.

The UK has committed to net zero by 2050, and the Government knows that pension investments have a significant role to play in meeting that target.

That’s why the Pension Schemes Act 2021 places new duties on pension trustees to ensure that they are selecting fund providers that are proactive in their approach to climate change.

In addition, the financial industry regulator – the Financial Conduct Authority (FCA) – stated in its Climate Change Adaptation Report that funds should “disclose information to enable consumers to make an informed judgement about the merits of ethically investing in that fund.”

There may be some way to go but the direction of travel appears set. Both savers and regulators are pushing for a shift towards greener, more sustainable pension funds.

Green investing is smart investing

One further factor may ensure that the move towards greener pensions continues to gather pace.

There’s growing evidence that funds which focus on sustainable businesses and sectors outperform their traditional counterparts. In other words, your pension might be worth more in the long run if it is invested in greener funds.

In particular, funds that conform to what’s called ESG (Environmental, Social and Governance) criteria produce higher returns than those which don’t. That’s likely to become even more true in future.

The reasons are simple. Investors and stock markets know that unsustainable industries are likely to face growing government regulation and more intense consumer backlash over the coming years. They will be forced to spend large sums of money to reduce their climate footprint, if that’s even possible. All these factors will combine to limit their potential for profit.

On the other hand, sustainable industries will be encouraged by governments, and are already growing quickly. The results are striking. Research by Morningstar found that sustainable funds have matched or outperformed non-sustainable funds over the past 10 years. Over the next ten years, that’s likely to be even more true.

In financial terms, sustainable pensions simply represent far less of a long term risk than traditional counterparts. That’s particularly important for pensions, which are of course a long-term investment.

The role of your IFA

Independent Financial Advisors are at the cutting edge of this new movement.

As a company, we have always carefully considered factors like financial strength, historic returns, level of service and the cost of charges when conducting due diligence on the funds we recommend.

Now, we look at ESG criteria too, to make sure the claims made by the funds and companies we recommend are matched by actions that will reduce the financial risk for our clients. We also stay alert to any claims that might be regarded as “green washing”.

We think this is right for our clients, and the planet. Younger savers in particular are far more likely to commit funds to a pension if they think it’s making a material difference to the fight against climate change. Offering greener pensions has the added benefit of helping to secure the financial futures of people who may not previously have engaged with the private pension market.

Or to put it simply, green pensions are a win win for everyone concerned. Demonstrably sustainable pension funds can make a real difference to the fight against climate change, and they are becoming increasingly popular among savers who want a healthy pension pot and a healthy planet.

For more information on greener ways to save for your pension, please get in touch