UK pension funds are worth approximately £3tn with this huge wealth invested in assets all over the world. If you are eager to reduce your carbon footprint, making your pension “green” is 21 times more effective than giving up flying, becoming a vegetarian and changing an energy provider combined, according to the campaign group Make My Money Matter. So how can you make your pension better for the planet?
What is ‘more green’ to you?
Romi Savova, the chief executive of the pensions consolidator firm PensionBee, says the question you need to ask yourself is: “What does being more green mean to you?”
She says: “Because the way it is expressed in the pensions industry can be very, very different, depending on the pension plan and provider.”
When looking at whether your pension aligns with your values, one thing to consider is what your approach will be. “Are you looking for investments that exclude companies which contribute to environmental challenges, or do you want to be invested in a way that engages with these companies to push them to do better?” says Helen Morrissey, the senior pensions and retirement analyst at Hargreaves Lansdown.
“Engagement,” Savova says, “means you continue to invest in companies that may be major fossil fuel producers, for example.
“But your asset manager, or pension provider, takes an active role in engaging with those companies, to encourage them to reform, over time, and put themselves on a more sustainable trajectory for the future.”
Stakeholder engagement, with the threat of divestment, is powerful, says David Macdonald, the founder of the independent financial advisers Path Financial.
If people want their invested money to have a voice, then it’s got to be somewhere where the voice can be heard
Path Financial’s David Macdonald
“If you’re an active shareholder, you’re challenging them constantly to improve standards, to make faster changes, to have more credible pledges – with the threat of divestment if they don’t,” he says.
“So moving the money into a fund which takes its stakeholder responsibility seriously, and drives for the change that it’s talking about, is far more impactful than just investing in those companies passively in, say, a tracker, where nobody gives a damn about what the companies are actually doing.
“If people want their invested money to have a voice, then it’s got to be somewhere where the voice can be heard. And that comes through a more active approach to being a stakeholder,” Macdonald adds.
Beyond these choices, you move into actually trying to direct your money to do something genuinely positive, Savova says. “You would be making sure that money goes into renewable energy, healthcare, social bonds, as opposed to, say, government bonds.”
Check a workplace pension
“Your provider should be able to help you find out where it invests, and, if you already have an online account, you should be able to get details of what your pension is invested in,” Morrissey says.
However, she adds: “It can be difficult to drill down and get all the data you need – you may only get the top 10 holdings, for instance, or you may find your funds are invested in other funds so you can’t immediately get the detail needed.”
If you are not happy with what you find, Morrissey suggests asking your provider if they have any other funds you can switch to, that are more suitable.
“Don’t just accept the default that you’re given; poke around a little bit and see what the options are,” Macdonald says.
“The provider might have an ethical fund, or an environmental, social and governance (ESG) choice, which is better than the default.”
It is worth noting, too, that ESG is a broad term, open to interpretation and, by unfortunate extension, greenwashing.
“As responsible investing has become more high profile, it has led some managers to overstate the progress they are making in incorporating ESG factors into their strategies,” Morrissey says.
“Before deciding to invest, it’s worth checking to see if they have signed up to any industry initiatives such as the UN-backed ‘principles for responsible investment’.
“Managers have to commit to invest responsibly, as well as incorporate ESG issues into their investment analysis and decision-making processes,” she says.
“Many will also issue responsible investment reports, which you can find on their websites.”
Put pressure on providers
Crucially, if you are in a workplace pension, the provider will have been chosen by your employer. Simply stopping paying into that pension, and opening a new one, would mean you would lose your employer contribution.
We have managed to help get £1.3tn in UK pension funds committed to net zero
Make My Money Matter’s Kenneth Green
You could, instead, put pressure on pension providers from “within” to encourage them to change their investing ways.
If your workplace provider doesn’t offer a fund that matches your environmental values – or even anything approaching them – Make My Money Matter has a tool on its website that allows you to select your provider and send a pre-written letter asking it to offer green pension funds.
“Within the sector, we have had feedback from pension funds saying that people emailing them has actually made a difference,” says Kenneth Green, the campaigns manager at Make My Money Matter.
“We have managed to help get £1.3tn in UK pension funds committed to net zero.”
Transfer old pensions
“A lot of people will have old pensions they’ve left behind when they’ve moved on from various jobs,” Savova says.
“In the vast majority, those pensions will be invested in so-called default funds, which are chosen by the employer. And the vast majority of those will have exposure to fossil fuels, including producers like Shell and BP.
“It can be a bit of a surprise to savers, who have often gone the extra mile in making their daily habits greener, to find their pension is invested directly in fossil fuels.”
If you are no longer happy with the way those funds are invested, you can make changes.
“Once you’ve figured out where your current pensions are invested, you can decide what to do with them,” Savova says. “Often that will mean consolidating them into a new online plan.”
It is possible to do this yourself but there are a number of consolidation firms that transfer pensions into one place; some, such as PensionBee, have fossil fuel-free plans.
Compare any changes carefully, and be sure there will not be negative consequences, Morrissey says: “Before deciding to transfer, it is worth checking that you won’t miss out on any potential benefits, such as guaranteed annuity rates, or incur any exit penalties.”
Before making any decisions about pensions, it is wise to take professional advice. You can find a list of independent financial advisers specialising in ethical investment on the Ethical Investment Association website.
Compare and contrast
“Your pension is built for your retirement. It’s built for your future. You don’t want to put it in something that could be inherently risky,” Savova says. There is, of course, always a risk in investing. But how do green funds compare with those that don’t use sustainability criteria? According to Morningstar, across six different categories of fund and over a five-year period, sustainable funds consistently outperformed their standard counterparts by between 0.54 and 1.91%.