Pension investors are looking for better means to force climate action

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Retirement savers around 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.

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

Katrina Brown, chief investment officer at UK wealth advisers Evelyn Partners, says: “While not the most engaging of reads, it quickly becomes clear which ones have really worked to understand complex issues and which ones are just ‘talking’ . “

Some schemes seek to publicly use their influence on the companies they invest in, encouraging them to reduce their carbon output. For example, last year the Church of England’s endowment fund and pension scheme announced it was selling investments in 11 major oil and gas companies after concluding none were aligned with efforts to stop global warming.

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

“Although more than 95% 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 better align with their environmental and social values, ranging from how a company treats the environment to its own employees, whether it’s paying a living wage or standards of work.”

In all, the rapid growth in interest in environmental and other forms of ethical investing led to the placement of nearly $3.1 billion in nearly 7,700 vehicles labeled as sustainable funds by the end of the second quarter of this year, according to data provided by Morningstar. Most of these funds are based in Europe.

However, the once rapid growth in money allocated to such funds has slowed recently. The decline comes amid concerns about exaggerated environmental claims, or “greenwashing,” by some vehicles, a political backlash in the U.S. against ethical investing and the underperformance of some funds compared to their conventional rivals.

Morningstar research shows a continued slowdown in flows and product development in the first half of 2024. Despite this trend, 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 more options. This is not an option only for the self-employed. Frozen or retained pensions from previous employers can be moved into a Self-Invested Personal Pension (Sipp), which could provide access to a wider range of investments that benefit the environment or pursue other ethical goals.

Alex Watts, fund analyst at UK-based online trading and investment platform Interactive Investor, says: “Approaches to sustainable investing range from simply using exclusions to ‘sin’ actions to achieving positive environmental and social impact .”

Different investors will have different preferences about balancing strict financial performance with broader goals.

Tom Bailey, head of research at HANetf, the London-based issuer of white-label exchange-traded funds, says: “I like to use the distinction between a company (or) asset class that ‘does well’ 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 compared to their peers .

Bailey says exchange-traded funds focused on renewable energy are still very popular. In addition, there has been much innovation in the screening and reweighting of stocks in standard indices such as the FTSE 100 or the S&P 500.

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

However, the proliferation of options can itself be a barrier to decision making. Those looking to invest their individually managed personal pensions in a sustainable manner could therefore seek advice from some of the big investment platforms – for example updates on Interactive Investor’s ACE 40 list of sustainable investments or the short of AJ Bell’s responsible funds.

To further support investors interested in supporting the climate, the UK’s Financial Conduct Authority announced sustainability disclosure requirements, including ‘anti-greenwashing’ regulations, which came into effect at the end of May. They are intended to prevent organizations from making vague, misleading or false claims about the environmental impact of their products or operations.

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

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