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Published 01 October 2021
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How ethical pension funds work

Ethical pension funds bring socially responsible investing to retirement planning by ensuring the underlying investments meet Environmental, Social and Governance (ESG) criteria.

You may care about the planet, donate to green projects and carefully sort your recycling but have you ever thought about how your pension is affecting the planet? Many of us would be horrified to find that we are invested in arms firms, tobacco companies and fossil fuel miners but you could be via your pension.

Indeed, a NerdWallet survey looking at the ethics of 1,612 UK adults saving into a pension found that nearly 9 in 10 would feel unhappy for their workplace or personal pension to be invested in a company with a poor environmental (88%) or social or governance record (87%). Meanwhile, 79% also said that they would take issue with their pension being invested in a fund or company that isn’t ethical, even if it is delivering a good return.

The good news is you can turn your pension into an ethical powerhouse capable of helping the planet and society far more than all your other efforts. Here’s how.

What is an ethical pension?

Your pension is a wrapper for a range of assets that your money is invested in for growth, so that it can one day provide you with a retirement income. You can find out more in our guide to how to save for retirement.

An ethical pension means that your investments have been carefully selected to either avoid companies and investment sectors that harm society or the environment, or that go out of their way to actively improve things.

How can you find ethical pension funds?

The first step is to contact your pension provider to see how much control you have over what is held in your pension. If you have a workplace pension you may be able to choose from a range of funds that your provider offers. If you have a self-invested personal pension (SIPP) you should be able to choose what you hold in your pension from a vast array of funds, stocks, bonds and other assets.

You then need to look at the investments on offer and hunt out the ethical funds. The simplest way to do this is to look for ESG funds. This means the underlying investments meet certain criteria for Environmental, Social and Governance.

  • Environmental – Companies are assessed on their energy efficiency, waste, pollution, treatment of animals and conservation efforts.
  • Social – This looks at how a company treats its employees and suppliers. For example, its health and safety record or whether it pays a fair wage. It may also look at the impact a business has on its local community.
  • Governance – How is the company run? This assesses how transparent its accounts are, has it been caught operating illegally or does it take part in political lobbying?

This will give you an overview of how ethical a fund is, but it isn’t foolproof. There is no industry-wide method for deciding if a firm is ethical or not, it is down to you or a fund manager to decide. This means you may not personally agree with what a fund manager thinks is ethical. For example, an ethical fund may invest in an energy firm that still gets a lot of its profit from fossil fuels but invests in sustainable energy. That may not match with your own ethical standpoint. So, it is also worth looking at the fund’s objectives and its top 10 holdings. This will give you a clearer idea of what your money could be supporting.

According to the NerdWallet survey 85% of pension holders do not know where their pension is invested, with over a third (34%) wanting their workplace or personal pension provider to be more transparent about the companies their funds are invested in. As a result, 85% of respondents did not feel confident that their pension fund is in assets that are not harmful to society.

Who provides ethical funds?

Ethical investing is increasingly popular and investment companies are keen to meet the growing demand. This means most pension providers now offer some ethical investment options. This could be some ethical funds, or you may be able to choose an ethical pension portfolio.

There is also a lot of information online on the best ethical funds to help you choose what to invest your pension in. Some investment platforms, for example, feature ethical fund shortlists to help you in your search, which you can access whether you are a customer or not.

Alternatively, some robo investors now offer socially responsible portfolios that you can invest your pension in.

Even if you are auto enrolled into a workplace pension you may still be able to invest ethically. Nest, the workplace pension scheme created by the government, offers an ethical pension fund.

What is the impact of an ethical pension?

Switching some, or all, of your pension into ethical investments can help society and the planet. Research by sustainable fund manager Nordea found that placing your pension money into green investments could save 2,223 tonnes of carbon over your working life. In contrast, cutting down to one return flight a year would save an average of 19 tonnes.

Your pension could be your secret weapon in the fight against climate change. By investing your pension in ethical companies, you provide them with long-term capital to help grow their business and achieve their aims.

The message that your pension can be a force for good is beginning to resonate with pension holders. The NerdWallet survey found that most workplace and personal pension savers are optimistic about the power of their pension, with 82% agreeing that investing their pension ethically has the potential to influence how companies behave.

To add to the attraction, ethical investment funds can sometimes outperform traditional funds. Research agency Morningstar found that over ten years, nearly 60% of sustainable funds beat their traditional rivals across seven categories. It also found that sustainable funds fared better during the coronavirus sell off in the first quarter of 2020. However, past performance is not a reliable guide to the future.

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than you originally paid in.

Research methodology: The research was carried out in September 2021 for NerdWallet by market research company OnePoll. Ten questions were posed to a sample of 1,612 nationally representative UK adults with a personal or workplace pension about their thoughts on pensions.

Image source: Getty Images

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