How to have a (more) ethical pension
If you are a conscientious consumer (and liked our last piece) then here's how to make sure your pension invests in the things that matter to you.
The first thing you need to bear in mind, if you are wanting to make your pension a greener one, is that you will have to do your research.
This can put a lot of people off, and indeed it used to.
But now ethical investing is more mainstream. The Covid-19 pandemic has helped shift people’s perceptions from passive to proactive when it comes to deciding where we invest and save our cash.
Ethical pension: Finding your own ethical agenda
Sadly. as yet there are no ‘industry standards’ when it comes to ESG - that’s environmental social and corporate governance - investing.
The Financial Conduct Authority (FCA) is currently working on ways of tackling ‘greenwashing’ which is when investments claim to be good for the planet, but may not necessarily be.
So when you embark on your ethical challenge then you will have to decide what your own ‘red line’ is.
What is an ethical investment?
As an aside and an idea of just how challenging this can be, I’ll give you an example:
At an investment dinner of a well known investment trust journalists were treated to a chat as to the fund’s latest investments.
The fund manager talking told the journalists they were shifting some of their ESG weighing (fancy word for the proportion of the fund invested in certain sector) towards certain companies (often called stocks or shares).
In its ‘ESG’ weighting the fund had included British and American Tobacco.
Yes a tobacco company.
Why? Because BAT was investing more in e-cigarettes, so the fund manager and his team had decided BAT was doing some good, in weaning people off the more dangerous form of nicotine.
This is the same thinking that means companies like BP and Shell can also crop up in an ESG-themed fund, because they are investing in green energy.
So you see you need to have your own ESG boundaries. Indeed some of the world’s largest companies are doing their bit, but you need to decide if you want to invest in these companies.
Tough isn’t it?
But pensions are powerful tools to change the world we live in, so if you are serious about making a change your investment clout can make a difference.
Research by Make My Money Matter showed that moving an average-sized pension pot from a traditional investment fund to a sustainable one could save 19 tonnes of carbon a year.
The same research showed that greening your pension is 21 times more effective in cutting your carbon than giving up flying, becoming vegetarian and switching to a renewable energy provider combined.
Ethical pension: If you have a company pension
If you are over 22, and you work for a company, then you will be enrolled in your company’s pension scheme.
David Henry, investment manager at Quilter Cheviot, explained to me that this means you’ll likely be invested in the default fund option.
You can check out how green your default fund is by reading this piece.
He said: “It’s worth seeing if the pension scheme has an ethical or sustainable fund option for you to invest in instead.
Amanda Latham, who has worked at the Pensions Regulator, pensions consultant Barnett Waddingham and is now at IMF Investors, believes the government needs to do more to make ethical funds the default option,
She said most savers believed the default pension fund should be an ESG one but that 80 per cent of people with a workplace pension have never made any changes to the funds they invest in – and a further 11 per cent have only made a change once.
Although most savers want their pension to be invested responsibly, research from Barnett Waddingham in 2021 revealed that very few of the 18 million people auto-enrolled into workplace schemes had moved their investments to sustainable funds.
She said: “It’s unclear whether members of workplace pension schemes stick to default funds because they are unsure how to access their pension, or because they are disinclined to adapt fund selections – perhaps based on confidence that trustees and governance committees have considered the investment strategy appropriately. But sticking with the default could potentially leave them in funds which no longer match their risk appetite and investment preferences, or aren’t equipped to make the most of market conditions.”
“The UK’s organ donation system is one of the most effective examples of opt-out policy in the world, but it’s a criminally underused tool when we’re looking to enact real change while protecting agency. By transitioning default workplace pensions to ESG funds, we’d see a tremendous impact on sustainable investing. As with the organ donation example, we’d likely also see a huge increase in conversation around pensions, prompting people to engage with their retirement savings and make their money matter. If the UK is going to be a leader in a greener world, there’s no time to waste – we need to follow the money and do what it takes to make change happen.”
Can ethical funds boost my pension?
Clare Reilly, chief engagement officer of PensionBee, said: “Ethical investing is a great way for savers to achieve positive returns on their investments whilst also prioritising their environmental or religious beliefs.
“Ethical pensions focus on environmental, social and governance considerations within investment decisions.”
She said: “These funds can invest in companies that meet a strict set of criteria, such as being Paris-Aligned, or they can exclude certain industries completely (such as fossil fuels or tobacco) that fail to meet required standards. In some cases, the fund might even do both.
When it comes to investing in an ethical way, it’s essential that savers look under the hood to check what they are actually investing in, as many indexing approaches will still include tobacco and oil companies, for example. If savers don't want to include oil in their pension then they will need to go fossil fuel free, which can mean going down the active management route.
Reilly warned that there had been a rise in the number of ‘green pensions’ in the market.
“However, these funds tend to use a lot of jargon and confusing ESG ratings. The best way to try and understand if a pension scheme is genuinely green is to ask the provider about the objective of the fund.”
“At PensionBee, we have two ethical investing options currently on offer to our customers as part of our ongoing commitment to building a sustainable future - the Shariah plan, and our fossil fuel free plan. Our Shariah Plan was launched in 2019 and excludes investments in alcohol, tobacco, military equipment, weapons, pornography and products containing pork.
“Savers in this plan can be confident that their savings are invested in a Shariah compliant manner, with all investments approved by an independent Shariah committee who work closely with the money managers, HSBC Global Asset Management.
PensionBee’s fossil fuel free plan launched in December 2020 and invests in over 1,400 global companies and is one of the first mainstream funds of its kind to completely exclude firms with proven or probable reserves of oil, gas or coal, as well as tobacco companies, manufacturers of controversial weapons and persistent violators of the UN Global Compact.”
Going ethical: Your pension point plan
Jeannie Boyle, a director and chartered financial planner at EQ Investors, urged all pension savers to look at their ethical options:
Most companies will offer a list of funds you can chose from. Ask to see the companies the fund invests in to see how ‘green’ these are. It can be difficult to get a complete list of holdings, but most funds will show you the top 10.
Look for funds that set out to make an impact, rather than those that just use ESG screening. Impact funds tend to look at the product or service of a company to see if it is making a positive difference. ESG screening often only covers how a company behaves, rather than what it does.
There are many ways to invest ‘sustainably’ which makes it hard to understand what is right for you. Websites like Fund EcoMarket and Good with Money can help you understand the approach a fund manager is taking.
Remember that you will need your pension to live on when you retire – don’t forget the investment fundamentals. Your funds and level of risk should still be appropriate for your circumstances. It’s better to pay for some advice than make a mistake with your pension investments.
Ask your pension company what commitments they have made to reducing their carbon footprint.
Ethical pensions: Making it personal
Henry Tapper, is chair of AgeWage and Pension Playpen.
He said: "If you are scrupulous , you can build your own portfolio of investments using a self-invested personal pension (SIPP). This gives you total control but it's a labour intensive way of doing things. Hargreaves Lansdown and Interactive Investor allow you this level of control. “
Tapper points out that those prepared to give the management of investments to a fund can look at the markets section of the FTSE.
He said: “The FT markets section lists 69 ethical funds and nine ETFs which can be investments in a SIPP. If you are already saving into a workplace pension through payroll then you should ask your provider. Most will offer a sharia compliant fund and a fund labelled "ethical". Nest has its own ethical fund which is unique in changing over time to suit your lifestyle.
So you can choose to invest according to your ethics in almost all "defined contribution" funds. If you're in a defined benefit fund - your investments are in the hands of your trustees, you should ask them for their statement of investment principles and read their trustee chair's statement to find out how their ethics are aligned to yours. If you don't like what you hear, you can ask to become a member-nominated trustee yourself."
Ethical pension case study
One of the largest pension funds in the UK is Nest. It has 12 million members and invests around £450m a month on their behalf.
Nest;’s ethical fund will avoid investing in companies that test cosmetics on animals and will only invest in companies that meet animal welfare codes of practice.
It also avoids investing in companies that make weapons, test cosmetics on animals or carry out controversial mining practices.
Maria Nazarova-Doyle, head of pension investments and responsible investments at Scottish Widows and now head of sustainable investments at IFM Investors said: “It’s important for pension savers to be confident that their pension isn’t fuelling the issues they are worried about in their daily lives.”
Ethical concerns are important to many people who are changing their daily purchasing habits away from brands that don’t align with their values, and towards those that do.
“While many people don’t often think about their pension when they take actions like this, this does represent an opportunity for consumers to align their pension investments with causes close to their heart – they can do so by finding a reputable provider that offers ESG-informed funds and investments for pension savings.
“Everyone’s priorities differ, but there are a lot of features where common ground can be achieved. For example, at Scottish Widows we manage two ethical funds that do not invest in animal testing or arms, amongst other sectors. While excluding these sectors, the funds aim to invest in companies that display strong ethical behaviours.
“So an easy place to start would be to see what your pension fund already offers and if you don’t think the choice is sufficient, write to your trustees or pension provider and express your views.”