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Pension savers globally are increasingly interested in investments that support environmental sustainability. Whether participating in a workplace scheme or managing a private pension independently, numerous opportunities are at their disposal.
Since 2022, UK pension schemes with assets over £1bn are mandated by law to assess and disclose their climate-related risks and opportunities. Each applicable scheme should provide a climate report accessible on its website.
Katrina Brown, responsible investment director at UK wealth advisory firm Evelyn Partners, remarks: “While they may not be the most engaging reads, it’s becoming clear which schemes truly grasp the complexities involved and which are merely ‘talking the talk’.”
Some schemes actively work to leverage their influence over the companies they invest in, urging them to minimize their carbon emissions. For instance, last year, the Church of England endowment fund and pension scheme declared they were divesting from 11 major oil and gas firms, having determined that none were aligned with initiatives to combat global warming.
Becky O’Connor, director of public affairs at PensionBee, a UK provider for pension consolidation, adds that individual investors have the choice in selecting the funds for their pension contributions.
“Even though over 95 percent of individuals stick with their default pension plan, most workplace providers will offer a responsible or ethical choice,” she clarifies. “These options permit individuals to invest in companies that resonate more with their environmental and social preferences, from how a company treats the environment to its treatment of employees, including aspects like fair wages and working conditions.”
Overall, the burgeoning interest in environmental and ethical investments led to nearly $3.1tn being allocated to about 7,700 funds labeled as sustainable by the end of Q2 this year, based on data from Morningstar. A significant portion of these funds are located in Europe.
However, the previously swift growth in money directed towards these funds has recently tapered off. This decline coincides with worries about overstated environmental assertions, or “greenwashing,” political pushback against ethical investments in the US, and some funds underperforming relative to their traditional counterparts.
Research from Morningstar indicates a continued decline in both inflows and product development during the first half of 2024. Nevertheless, UK pension savers and other investors still have numerous options.
Selecting pension providers and funds individually can significantly expand choices. This isn’t exclusively an option for the self-employed; frozen or preserved pensions from former employers can be transferred into a self-invested personal pension (Sipp), potentially granting access to a broader range of investments that are environmentally friendly or aligned with other ethical aims.
Alex Watts, fund analyst at the UK online trading and investment platform Interactive Investor, states: “Sustainable investing strategies range from simply avoiding ‘sin’ stocks to creating positive social and environmental impacts.”
Different investors may prioritize various aspects in terms of trading off financial returns against broader objectives.
Tom Bailey, head of research at HANetf, a London-based white-label issuer of exchange-traded funds, explains: “I like to differentiate between companies or asset classes that ‘do good’ and those that ‘are good.’”
He describes ‘doing good’ as companies that manufacture environmentally beneficial products, such as electric vehicles or solar panels, whereas ‘being good’ refers to companies or asset classes that have lower carbon emissions compared to their peers.
Bailey shares that exchange-traded funds focusing on renewable energy remain quite popular. Additionally, there has been a surge of innovation in screening and reweighting shares in standard indices like the FTSE 100 or S&P 500.
“This framework takes a commonly favored strategy, asset class, or sector and then ensures that the fund has lower associated emissions,” Bailey notes. “This presents a broader array of options for investors committed to climate action.”
However, the abundance of choices can sometimes hinder decision-making. Investors managing their personal pensions sustainably might benefit from recommendations offered by large investment platforms — for example, updates in Interactive Investor’s ACE 40 list of sustainable investments or AJ Bell’s compilation of responsible funds.
To further assist investors keen on supporting the climate, the UK’s Financial Conduct Authority has introduced sustainability disclosure requirements, comprising “anti-greenwashing” regulations that became effective at the end of May. These measures aim to prevent organizations from making vague, misleading, or false statements regarding the environmental impact of their products or operations.
O’Connor comments: “The new regulations should instill confidence in investors that claims are substantiated by their underlying investments. While there’s still much work to be done, the regulator’s intervention is a substantial move forward.”
Climate Capital
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