ESG pensions: How to ethically save for your retirement

Previously, we wrote about environmental, social, and governance (ESG) investing and the respective benefits that we felt you needed to know. This month, we are taking a more focused look at the subject – specifically at the issue of ESG pensions.

ESG funds are a great way of investing your hard-earned cash into investments that are aligned with your personal values, ethics, and beliefs.

In order for a fund to be considered ESG-compliant, it needs to follow certain criteria revolving around three core pillars:

• Environmental factors, such as issues surrounding conservation and sustainability
• Social factors, such as workplace diversity and equality
• Governance factors, such as how ethically businesses manage themselves.

ESG pension funds are a way for you to support companies that align with your closely held values through utilising your long-term retirement savings to do the same.

Here is what you need to know about how ESG pensions work and the potential pros and cons you might want to weigh up before opting to move your retirement contributions into one.

ESG pensions allow you to put your retirement funds to work making the world a better place

An ESG pension fund invests your contributions in companies or assets that align with ESG criteria or are defined as being ESG-compliant.

An ESG pension fund might opt to follow one or all of the following paths towards fulfilling your ethical investing goals, such as being:

• ESG exclusionary: an approach that involves avoiding investments in industries that are fundamentally opposed to ESG goals, such as fossil fuels or the defence industry
• ESG inclusionary: an approach that looks directly at an investment’s ESG score as given by a relevant agency
• Impact investing: a theme-based approach focusing on companies that work to progress ESG goals, such as developing clean energy or promoting social change.

If you have progressive values, an ESG pension fund might seem like a desirable addition to your financial plans. It could allow you to put your future retirement funds to good use promoting positive change in the present day.

In a study of advised individuals, Royal London discovered that 31% sought out ongoing advice on pension and retirement planning. For many Brits, their long-term savings and retirement income goals are a key concern.

Yet, while saving towards their retirement might be a key focus for many Brits, understanding how their pensions are invested is often an afterthought.

A lack of key pension knowledge is a fundamental issue. Indeed, FTAdviser reports that almost one-third of savers either simply don’t know where to go for retirement information or won’t accept any support.

Read more: 6 important pension terms you might want to know

Meanwhile, according to interactive investor, 53% of people don’t know whether their pension is invested in line with their values.

The UK pension industry is heavily involved in fossil fuels, which makes ESG pensions even more important

While ESG pension funds are bringing about much-needed change, the pension industry as a whole is still heavily invested in businesses that aren’t ESG compliant.

For example, climate change is a real, pressing issue and one that is likely to become increasingly problematic with each passing year. Yet even though our understanding and awareness of issues surrounding the environment has improved over recent years, the UK pension industry remains heavily invested in the fossil fuel industry.

According to PensionsAge, UK pension providers invest more than £88 billion into the fossil fuel industry – or roughly £3,000 for each average UK pension holder.

These revelations come despite Finder finding that 77% of Brits who intend to invest are likely to do so ethically. Finder’s study also discovered that:

• 57% of UK investors hold an ethical investment
• 88% of Brits will be more loyal to companies that support social and environmental initiatives.

The issue with the pension industry and supporting non-ESG businesses is one that organisations, such as Make My Money Matter, hope to shine a light on.

The group points out that “greening” your pension is 21 times more effective at reducing your carbon footprint than either adopting a vegetarian diet, giving up flying, and switching your energy provider.

Greening your pension is becoming simpler to do and more easily accessible

ESG Clarity reports that 14% of Brits have opted to make the switch to environmentally and/ or socially sustainable pension funds.

This comes as research from Scottish Widows shows that ESG factors are becoming increasingly important in workplace pension discussions. Their findings show that 83% of workers expect their employer to take an active stance on ESG issues, and 25% want green pension options from their employers.

ESG investing has become more mainstream over the past decade and has become a primary focus for many Brits actively saving into their pension schemes. According to Aviva, 72% of UK pension savers report considering ESG factors important when investing.

If you’re keen to aligning your pension funds with your ESG beliefs, you could:

• Save your pension contributions into an existing ESG-compliant pension fund, which many major providers now offer
• Open a self-invested personal pension (SIPP) and direct your funds towards investments that you believe align with your values, such as green energy suppliers or companies developing sustainable technologies.

Keep in mind the pros and cons of ESG investments before making your final decision and seek out advice

ESG pensions can have many of the same downsides that ESG investments possess, such as:

• Being susceptible to “greenwashing” practices
• Not being as diversified as traditional funds
• Possibly not producing the same level of gains as traditional funds.

But they could allow you to ensure your retirement funds are aligned with your beliefs. It is all about weighing up the pros and cons.

If you reach out to us for advice, we can discuss potential options available to you and guide you towards the one best aligned with your overall goals.

Email us at helpme@aspirellp.co.uk or call 0117 9303510.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.