ESG investing – how green is your pension?

Making better choices for the sake of the planet is something most people are getting behind. But how can you take it beyond your choices in food, packaging, fast fashion, transport? By investing ethically with your pension that’s how.

Pension assets are now in the spotlight in the fight against climate change and the drive for a more sustainable world. For many people, a pension becomes their biggest asset, even bigger than their home (!).

Together, everyone’s pension assets add up to a vast amount (UK occupational pension funds had a market value of £2.2 trillion at the end of 2019, according to ONS) so if individuals and the big institutions that manage pension funds choose to move their money from the likes of oil and gas into more sustainable companies and those creating what we need for a low carbon world (often referred to as ESG investments), the impact could be quite profound.

ESG meaning

ESG stands for Environmental, Social and Governance – they’re the factors considered alongside financial returns as part of ESG investing. 

Will I have enough money to retire on with ESG investments?

It’s important that the investments within your pension are working hard for you – you can read more about this here – so what does this mean for your pension? Are ESG investments any good or do they fall behind some of the more traditional investment classes? Well, let’s find out.

Yes you can make money from ESG. As with all investing, if you choose your investments wisely, they should make you money over the long term. Gone are the days when you had to compromise returns for your values, now they can come hand in hand and ESG funds have gone from niche to mainstream in recent years. In the tree and chimney chart below, we can see how ESG funds have performed compared to non-ESG funds.

Don’t forget, as always, investments can go down as well as up and you can lose money.

Did you know…Morningstar evaluated 745 sustainable funds based in Europe and found the majority performed better than non-sustainable funds over one, three five and 10 years?*

How do you get a sustainable pension?

Well, ESG investments are readily available now and a lot of pensions give you far more flexibility over your investment choices than they used to.  

The challenge actually comes in navigating the ‘green maze’ of buzzwords, jargon and different types of ethical, responsible, and impact investments; keeping on top of new developments in such a quickly evolving area; and, really importantly, avoiding greenwashing.

Greenwashing

This is when a company makes out that it’s greener than it really is. You have to make sure the investments your money has made a home in are the real deal since a lot of companies are jumping on the ESG bandwagon.

Did you know... according to Morningstar, ESG fund assets reached US$1.65 trillion at the end of 2020?

Investing ethically

When you’re ready to get started, the first thing to do is check with your pension provider to see if they offer ESG options. If you can’t get what you want with your existing provider, remember that you can switch to a new provider that offers you more.

But don’t forget, make sure they have ethical investments that are worth switching for, check any exit fees that come with leaving your current provider, and any benefits that you might lose by transferring.**

Why not take a look at…

Funds – these are a great way to access different ESG investments and spread your money and risk. They’re more diverse, so it leaves behind the issues that come with putting your eggs in one basket.

Shares – if you know what you’re doing, you can pick individual shares that you feel could do well for your money and the planet’s future.

Ready-made options – if you don’t have the knowledge, time or drive to invest, ready-made options are a good option. They take all the pressure off you and give it to a fund manager who knows exactly what they’re doing. Sit back and relax.

Have you thought about a SIPP?

SIPPs give you the flexibility to choose your own pension investments so are an excellent way to build a green pension that suits your own values. You can pick the funds and shares you want rather than having to settle for the options offered by more traditional pension funds***.

There is an abundance of investments to choose from, you can have more control over them and consolidating any pensions you have already can help cut down on paperwork and provider fees**.

How Bestinvest can help

We have been helping clients invest with ethical funds for more than a decade now – long before it was fashionable – and we have an established process for researching and identifying the funds that we think fit the bill. Plus, our sister company Tilney, which is responsible for this process, won the Best ESG Investment Strategy award at the City of London Wealth Management Awards 2021.

Bestinvest SIPP

At Bestinvest, we have an award-winning SIPP known as the Best SIPP. You’ll have access to a wide range of funds and shares that can line up with your financial goals as well as your values. Plus, if you want to transfer an existing pension over to us, we pay up to £500 in exit fees****.

If you want some more information on ESG investing before you get started, take a look at our ethical hub. Our green guru, Louie French, goes through everything you need to know.

Or if you’re ready to go, but don’t know where to put your money to ensure you’re getting the most out of your investments and are avoiding greenwashing, try our top ethical and sustainable investment ideas. You can access plenty of funds and shares on our investment search.

 

Please note that some ethical funds may, by definition, have a limited investment universe; this may affect performance.

* Financial Times, February 2021

** Before you consider transferring a pension, it is important to ask yourself: Will I lose any valuable benefits or features from my existing pension plan? Will I incur any penalties on my existing pension if I transfer? Is it an occupational final salary pension scheme? (in which case it is very unlikely to be advisable to transfer) Have I considered the charges on my current plan? (a new arrangement may be more expensive – especially if you have a stakeholder pension).

*** SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you, then a SIPP might not be right for you.

**** T&Cs apply. Exit fees may be incurred on leaving Bestinvest.