Eco Tip #5

Welcome to the fifth installment of our Eco tip series, where we discuss the climate impact of pensions and what we can do about it!

It may not feel like it, but where you keep your money and how you invest it can make a big difference for the climate. This is because the financial institutions you choose to keep your money with, or invest your pension with, may be bank rolling the climate crisis. As a company or citizen, the decision you make with your money can therefore have a major impact on the environment.

One of the biggest ways you can make a difference with your money is through your pension. A staggering £34 trillion is estimated to be invested in pensions around the world according to a study by the Thinking Ahead Institute, that’s nearly half of the global investment market. In the UK, pension wealth totals £6.1 trillion, making up 42% of all wealth in the country. Yet less than 1% of assets held by the 100 largest pension funds in the world are invested in low-carbon solutions.

For most of us, our pension will be the largest investment we have and unless your pension is in a specifically dedicated ethical fund, then there is a strong likelihood that your money is invested in unethical sectors such as fossil fuels, arms, or tobacco. What makes an ethical fund ‘ethical’ is that it will have exclusion criteria, meaning it will avoid investments in sectors it deems unethical or unsustainable. However, many ethical pensions strive to not only avoid investing in these damaging sectors, but to ensure that your money is invested in supporting positive changes. This could be helping fund the transition to a low-carbon world or healthcare funding. Therefore, by switching to an ethical fund, you can ensure your money is having a positive impact. In fact, a report by Nordea, a Nordic financial service company, found that greening your pension could have an impact 21 times larger than other options for reducing your carbon footprint. However, shifting to a most sustainable pension fund cannot substitute emission reductions elsewhere or in reducing consumption. It simply emphasises the role your money can play and how vital it is to ensure you are investing in a sustainable future.

So, what can you do? Well, if you have a pension, you likely have one of the two main types of pensions – personal pensions/ self-invested personal pensions (SIPPs) or a workplace pension. Personal pensions or SIPPs are very similar, in that they tend to be set up by an individual and provides a much greater choice over your investment. However, personal pensions and SIPPS are most suitable for those who are happy to manage their own investments and should not be considered without the advice of an independent financial advisor or impartial organization. Workplace pensions on the other hand, are usually set up by an employer and normally both the employee and employer contribute. Following the auto-enrolment scheme brought in by the government in 2012, almost 80% of employees now have a workplace pension. Neither a workplace pension nor a personal pension is necessarily more sustainable, although the more flexibility offered by personal pension means you can have more control over where your money is invested. With workplace pensions, money is usually placed straight into the default fund, which rarely meets strong ethical standards. However, most workplace pensions offer several different funds and so it can be relatively easy to switch to a more ethical and sustainable fund – sometimes these funds are called ‘sustainable funds’, ‘stewardship funds’ or ‘low carbon funds’.

At the moment, there are no official standards for what constitutes an ethical pension fund and so although a fund may carry the name ‘ethical’ or ‘sustainable’, it may not align with your values. This is known as greenwashing. You will therefore have to do your own research to ensure that the fund is right for you. Ethical consumer and Good with Money provide a good overview of the different options and their ethical and sustainability credentials.

Below you can find a list of some of the main pension providers and the ethical funds they offer, as well as a guide for how to switch to the ethical fund within the National Employment Savings Trust (NEST), the non-departmental public body which was established under the same act as auto-enrolment to ensure everyone had access to a high-quality workplace pension scheme. Nest is also now the largest pension scheme provider with 9 million members. If you are not currently with NEST, but wish to switch to the ethical fund of your current provider, most will provide guidance on how to switch funds.