Here’s a question. Do you know exactly where the money in your pension is being invested? Think about it for a minute - you might know the name of the provider, or the funds you’ve picked; you might be able to quote the total value, and say something about performance, maybe something about the fees.
But can you name the actual stocks held, the real-life companies that your pension provider has invested your money in? Not many people can. It’s not your fault: the industry just doesn’t work that way.
This opacity is surprising when you consider just how much money is invested by pension companies every year. For example, in 2017, the average pension in the UK was worth about £50,000, and the total value of all UK pensions was $2.8 trillion. That’s a huge amount of money, just for the UK alone – for comparison, the entire global renewable energy industry is worth barely a quarter of that. And all too often, those pension funds are invested without a whole lot of consideration of the customer’s moral or ethical views.
The hidden costs of pensions
You might be an environmentally conscious person, trying to do your bit to reduce your carbon footprint. Perhaps you’ve invested in an electric car, or solar panels for your house. But it’s entirely possible – likely, in fact – that your pension holds stocks and shares in oil, coal, and gas companies. Even funds that are branded as “sustainable” or “ethical” may well contain shares in fossil fuel firms, tobacco companies, or even weapons manufacturers.
“ Even funds which are branded as “green” may contain significant fossil stocks, and “ethical” funds may hold assets in tobacco or weapons firms. As demand grows for ethical pensions, greenwashing has become a real problem in the industry.”
That a person might be unwittingly profiting from industries that they strongly oppose on moral grounds is clearly a problem. But it’s also an opportunity. Luckily, the remedy is simple, requires very little effort, and is affordable for everyone.
Let’s begin with a quick description of how pensions investments work.
“Ethical” pensions – not always squeaky clean…
The money that you pay to your pension provider every month doesn’t just sit in a vault somewhere. Instead it’s invested into different stocks, shares, bonds and so forth, which hopefully return a decent profit so that your pension pot grows over time. Your money is invested by your pension provider into a range of different “funds”, which are essentially bundles of different financial assets.
Often, your pension provider will allow you to choose from a range of different funds, allowing you to decide how risky or safe you want your investments to be, or to control how much of your pension is invested in equity, bonds, currencies, or other assets. Many pension providers also offer ethical or sustainable funds, which purport to be greener or cleaner than regular funds.
But crucially, these funds are normally not managed directly by your pension provider, but by specialist fund managers. These third parties invest your money into firms they believe will make a good return – and all too often, those firms are profiting from activities that you might find abhorrent.
Even funds which are branded as “green” may contain significant fossil stocks, and “ethical” funds may hold assets in tobacco or weapons firms. As demand grows for ethical pensions, greenwashing has become a real problem in the industry. Many fund houses have jumped on the green bandwagon and begun labeling funds as green or ethical, whilst retaining tremendous wiggle room to carry on the ’normal’ way of investing in the small print.
Greening your pension, for fun and profit
Luckily, things are starting to change. More and more institutional investors – like councils, universities and unions – are starting to divest their pension funds from fossil fuel industries. According to 350.org, more than 700 have dumped high-carbon stocks. This divestment is driven partly by ethics, but also by the fact that, for several years now, low-carbon stocks have chalked up significantly better returns than traditional “safe-bet” investments in oil & gas.
Organisations like ShareAction are putting pressure on large institutions and government bodies to explain (and clean up!) their holdings in industries whose continued existence poses a real risk to the future. And more and more companies at the other end of the chain – such as Purposeful.Money – are going beyond greenwash to create truly sustainable portfolios, that can deliver healthy returns for individuals while simultaneously contributing to social and environmental change.
By scrutinising the stock held in pension funds, and lobbying fund managers to remove questionable investments in high-carbon industries, it’s possible to create pension pots that even the most environmentally-conscious customer would be proud to call their own.
These funds aren’t just better for the planet – they’re also better for your pocketbook. Low-carbon firms continue to outperform traditional stocks, and as markets begin to shift in favour of carbon taxes, electric vehicles, and renewables, fossil fuel stocks are looking increasingly risky investments. In fact, several recent studies have found that portfolios that divest from fossil fuels and utilities and invest in clean energy perform better than those with fossil fuels and utilities.
The finance industry remains a mysterious beast to most people – something huge, complex, and distant, which they have very little power over. But in fact, it is possible to make a difference, and it need not be difficult or expensive to do so. Getting pensions sorted is just part of moving the money where it matters – away from the dangerous and irresponsible industries of the past, and invested in the clean, green technologies of the future.
Ben Martin, Green Economy Coalition
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