Pension investors seek better means to force action on climate

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Pension savers across the world are increasingly looking to invest their money in ways that help the climate. And, for those so inclined — whether as an employee with a workplace scheme or someone going it alone with a private pension — there are plenty of options available.

Since 2022, UK pension schemes with more than £1bn in assets under management have been legally required to consider and report on climate-related risks and opportunities. Each relevant scheme should have a climate report available on its website.

Katrina Brown, responsible investment director at UK wealth advisers Evelyn Partners, says: “While they are not the most exciting of reads, it is rapidly apparent which ones have really worked to understand the complex issues and which are just ‘talking the talk’.”

Some schemes seek publicly to use their influence with the companies in which they invest by encouraging them to reduce their carbon output. For example, last year, the Church of England endowment fund and pension scheme announced they were selling investments in 11 big oil and gas companies, after concluding that none were aligned with efforts to halt global warming.

Becky O’Connor, director of public affairs at PensionBee, a UK pension consolidation provider, adds that individual savers can choose the funds they put their pension contributions into.

“Although more than 95 per cent of people stay in their default pension plan, most workplace providers will also offer a responsible or ethical option,” she explains. “These funds allow people to invest in companies that align better with their environmental and social values, ranging from how a company treats the environment to its own employees, whether that’s in terms of paying a living wage or working standards.”

All told, the rapid rise of interest in environmental and other forms of ethical investment resulted in almost $3.1tn being placed in nearly 7,700 vehicles badged as sustainable funds by the end of the second quarter of this year, according to data supplied by Morningstar. The majority of these funds are based in Europe.

However, the once rapid growth in the money committed to such funds has slowed of late. This drop-off comes amid concerns over the exaggerated environmental claims, or “greenwashing”, of some vehicles, a political backlash in the US against ethical investing, and poor performance by some funds compared with their conventional rivals.

Chart showing total in billion dollars of quarterly global sustainable fund assets

Morningstar research shows a continued slowdown in inflows and product development during the first half of 2024. In spite of this trend though, there are still plenty of options for UK pension savers and other investors.

Choosing pension providers and funds on an individual basis can open up many more choices. This is not only an option solely for the self-employed, either. Frozen or preserved pensions from previous employers can be moved to a self-invested personal pension (Sipp), which might offer access to a wider range of investments that benefit the environment or pursue other ethical objectives.

Alex Watts, fund analyst at UK online trading and investing platform Interactive Investor, says: “Approaches to sustainable investing range from simply employing exclusions to ‘sin’ stocks, to delivering positive environmental and social impact.”

Different investors will have different preferences in terms of balancing strict financial performance against wider objectives.

Tom Bailey, head of research at HANetf, the London-based white-label issuer of exchange traded funds, says: “I like to use the distinction between a company [or] asset class that ‘does good’ versus those that ‘are good’.”

He defines the former as companies that produce environmentally beneficial products, such as electric vehicles or solar panels, and the latter as companies or asset classes that may have lower associated carbon emissions, relative to their peers.

Bailey says that exchange traded funds focused on renewable energy are still very popular. In addition, a lot of innovation has been taking place in the screening and reweighting of shares in standard indices such as the FTSE 100 or S&P 500.

“The framework is taking a typically popular strategy, asset class or sector and then taking steps to ensure the fund has lower associated emissions,” Bailey says. “This opens up a wider array of options for climate-conscious investors.”

However, the proliferation of choice can, itself, be a barrier to making decisions. Those looking to invest their individually managed personal pensions in a sustainable manner might, therefore, seek recommendations from some of the large investment platforms — for example, the updates in Interactive Investor’s ACE 40 list of sustainable investments or AJ Bell’s shortlist of responsible funds.

To further support investors interested in supporting the climate, the UK’s Financial Conduct Authority has announced sustainability disclosure requirements including “anti-greenwashing” regulations, which came into force at the end of May. These are aimed at preventing organisations making vague, misleading or false statements about the environmental impact of their products or operations.

O’Connor says: “The new rules should give a good amount of confidence to investors that claims are backed by the underlying investments. There’s a long way to go, but the intervention of the regulator is a significant step.”