Investing in a sustainable pension not only allows employees to achieve their financial goals, but also allows them to invest in funds that align with their personal values and positively impact the environment.
Sustainable pensions are also known as Green Pensions, ESG Pensions (Economic Social Governance) or responsible investments. They’re funds that invest in portfolios from businesses that have been evaluated to make sure they meet stringent environmental, educational and social criteria. Some investment portfolios specifically exclude categories such as tobacco and weaponry. Others will focus on investments that have a reduced environmental impact – for example in green energy as opposed to investing in fossil fuels or deforestation. In short, sustainable pensions must meet certain standards in business behaviours to advance goals.
Sustainable investing has the goal to generate long-term financial returns to meet the client’s needs. It also seeks to align the investments with companies that will benefit society and/or the environment through value-based investing.
The UK has an estimated £2.6 to £3 trillion invested in pensions. This is part of the estimated £50 trillion invested globally. On 1st October 2012 new pensions regulations came into force in the UK. This means that, by law, any business with more than one employee has to set up a workplace pension scheme and has to make contributions towards the pension, unless the employee specifically opts out of the scheme. The aim of the legislation is to make better financial provision for employees for later life. More employees than ever before are now contributing to a pension scheme.
Whilst this is a positive step forward for planning financial futures, many employees – estimated to be nearly 80% - do not know how and where their pension savings are invested.
Pension funds that are invested in industries such as mining, fossil fuels or those that drive deforestation have a significant environmental impact. These types of investments have a carbon footprint of their own, estimated by Make My Money Matter to be an average of 26 tonnes per pension per year. This is a ‘hidden’ carbon footprint that many employers and employees are not aware of.
Reducing a personal carbon footprint comes from lifestyle choices such as choosing to use renewable energy, reducing flying, off-setting, recycling or switching to an electric car. With only 22% of employees (estimated) knowing where their pension funds are invested, there is a big risk that their pension investments are conflicting with their personal values and sustainability goals, without them even knowing it.
Whilst personal choices are a great way to reduce an individual’s carbon footprint, much larger savings can be made when it comes to pensions. With the average pension having a carbon footprint of 26 tonnes of carbon per year, employees and businesses can make a huge impact by switching to more sustainable and ethical policies. It is estimated that by investing in sustainable pensions, employees can reduce their carbon footprint 21 times more effectively than through their personal choices alone.
By switching providers and investing in ethical funds, companies that are tackling climate change are being financially supported and can have an even greater impact. In contrast, those companies that have more of a damaging impact on the environment have their financial support reduced.
The Path, a firm of financial advisers that specialise in sustainable investments, carried out a study in which they reported the impact of switching to a positive impact portfolio. By switching a fund of £100,000 from companies that invested in ‘traditional portfolios’ such as mining, oil and gas to a sustainable pension, they estimated the environmental impact would be equivalent of taking half a dozen cars off the road per year.
Make My MoneyMatter is an organisation that is providing visibility and knowledge about the impact of pensions on the environment. They are trying to drive the investment of the UK’s pension investments away from damaging industries, towards more sustainable portfolios of businesses who are tackling climate change.
Make My Money Matter joined forces with Aviva and Route 2 to carry out research on the impact of switching to sustainable pensions. They found that by switching a policy with a value of £30,000, 19 tonnes of carbon could be saved per year, while a pension pot of £100,000 could save 64 tonnes per year. This is the equivalent of nine years of the average UK citizen’s carbon footprint.
The co-founder of Make My Money Matter, Richard Curtis, is quoted as saying how these findings show just how important it is to switch policies to tackle climate change. He says that, ‘pensions are the most powerful weapon we have’ to protect the environment.
Whilst switching to a sustainable pension has significant benefits to the environment, questions are also asked about their performance in comparison with traditional investments.
Research carried out by Morningstar in 2020, found that 75% of sustainable pension funds performed above average in comparison with traditional portfolios. They reported that 77% of sustainable pensions that had been launched in 2009 were still in existence 10 years later, in comparison with only 46% of traditional funds. Morningstar’s research also showed that 59% of sustainable pensions outperformed traditional pensions.
There is a significant rise in the number of sustainable investmentsthat are being offered, with many UK pension providers now offering sustainable pensions as their ‘default’ fund. This gives UK consumers much more opportunity to have a positive environmental impact through their investments.
With a lack of visibility and knowledge about where funds are invested, over 90% of employees leave their contributions to be paid into the pension provider’s ‘default’ account. These accounts may conflict with the individual’s personal sustainability goals by investing in traditional investments that we know have a negative environmental impact. Whilst many pension providers have now incorporated sustainable investing into their default accounts, there are many that are yet to make the switch.
Employers who have set up workplace pensions can look to alternative funds for their employee’s investments, which can be beneficial both in terms of sustainability and performance.
Switching to sustainable investing can also have a positive impact on company reputation. By investing funds in sustainable policies, companies are proving their commitment to achieving the Government’s target of achieving carbon net zero by 2050.
PayCaptain focuses on providing a payroll solution that benefits both employers and employees. PayCaptain’s core values include making payroll easy for employers and providing financial wellness solutions and valued benefits to employees.
Says Simon Bocca, founder of PayCaptain, “We are proud to partner with Collegia, a modern and ethical UK provider that provides sustainable pensions. Through this partnership, we have been able to offer employees the ability to view their pension pot directly inside the PayCaptain mobile app. This is invaluable for employees who want to make financial provisions for their future as they have real-time visibility of how their money is performing.”
With PayCaptain, employees can take control of their pension contributions directly from the PayCaptain App. Not only is pension information available, but they can make regular or one-off pension contributions from their pay directly in the app. This functionality improves their future financial stability as well as having a positive impact on the climate crisis.
In summary, switching to a sustainable pension has significant benefits in reducing the impact on climate change by investing in funds that have been evaluated to ensure they meet environmental, educational and social criteria. Investing in a sustainable pension helps employees meet their financial goals and allows them to invest in funds that align with their personal values. Offering sustainable pensions also has a positive impact on company reputation by responsibly investing for the future.
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