Is an ethical pension the most suitable choice for you?

The environmental crisis has been at the forefront of public consciousness lately, and for good reason. In fact, the Guardian states that, according to an Intergovernmental Panel on Climate Change (IPCC) report last year, it’s “now or never” if we’re to tackle climate change.

If you’re keen to do your bit for the environment, an ethical pension can be a surprisingly positive step in the right direction. Adopting this approach means you save towards retirement in a pension fund that solely invests in companies that operate sustainably.

Research presented by Nest shows that investing in an ethical pension can be 21 times more effective in cutting your carbon than giving up flying, becoming vegetarian and switching to a renewable energy provider combined.

Though, there are some important considerations to keep in mind when choosing an ethical pension to invest in. So, continue reading to find out exactly what an ethical pension is, and what you should consider.

An ethical pension is a retirement fund that invests in companies that operate responsibly

If you want to align your investments with your values, you may want to consider Environmental, Social and Governance (ESG) investments. These are so-called as they consider these three criteria when determining a company’s impact on our society and the wider planet.

Environmental – looks at how a company’s operations affect the environment, including energy use, how it manages waste, and even its treatment of animals. For instance, if a company produces chemicals, how does it handle toxic emissions?

Social – considers how a company treats its employees, and whether it works to ensure that suppliers and staff in its supply chain are treated ethically. For example, does a company monitor the working conditions of its employees and ensure their health is well looked after?

Governance – examines how a business is run, including the transparency of its accounting, whether shareholders can vote on important issues, and even its tax strategy. This also includes the political dealings of a company, such as making political contributions or engaging in illegal or unethical practices.

ESG scores indicate which companies align with your values, enabling you to invest in organisations that are having a positive impact.

When you save money towards retirement, your contributions will typically be invested in a range of different assets. So, an ethical pension is a type of retirement savings that invests your money in companies that meet ESG criteria.

Ethical pension providers will typically have policies determining the types of company they invest in. For instance, some may avoid companies that deal with coal or oil and instead focus on businesses in the sustainable energy sector.

The provider may also explain what it does to engage with and improve the behaviour of the companies it invests in.

Of course, this will depend on the type of pension you have. For instance, if you’re in a workplace pension, there may be an “ethical fund” option that will filter out companies that don’t meet ESG criteria.

Meanwhile, if you have a DIY pension, such as a self-invested personal pension (SIPP), you can choose companies and funds that align with your own views, or even invest in pooled ESG funds.

It’s worth noting that different people have varying ideas of what makes a company “ethical”. For this reason, it can be instructive to research the companies or funds an ethical pension invests in to ensure they align with your values and morals.

While you may initially think that growth potential is reduced with ethical pensions and ESG investing in general, this isn’t always the case. Research from Morningstar shows that, in the five years leading to the end of 2021, ESG funds showed “they can perform on par with or better than conventional funds”.

Some companies may “greenwash” to seem more environmentally conscious than they actually are

There are some key things you should consider before you invest in an ethical pension. First, ethical pensions can sometimes be less diversified than their non-ethical counterparts.

This is because they tend to avoid investing in certain sectors that aren’t deemed ethical, resulting in less diversification. This means that, if you’ve solely invested in ESG companies, you could be affected more by any volatility in particular sectors.

More importantly, ethical pensions, and ESG investments in general, have sometimes been accused of “greenwashing”.

Simply put, greenwashing is when a company claims to be environmentally conscious while indulging in practices you may not consider “green”. This may also include companies that are overstating or exaggerating their ESG credentials.

A famous example of greenwashing conducted on a grand scale was Volkswagen’s emissions scandal in 2015. VW was pushing its diesel cars in the US with a marketing campaign that claimed its vehicles were “low emission”.

However, the Environmental Protection Agency (EPA) in the US later found that many of VW’s cars were fitted with a “defeat device” that cheated emissions tests. This made the company’s cars seem less harmful to the environment when, in reality, the engines released nitrogen oxide pollutants up to 40 times above allowable levels in the US.

And, besides the apparent detrimental effects on the environment, greenwashing can erode the public’s perception and trust in how companies approach the climate crisis.

Fortunately, there are ways you can easily identify the tell-tale signs of greenwashing. You should keep an eye out for buzzwords such as “eco-friendly” or “natural”, as they may indicate that a company is trying to build the illusion of being more environmentally conscious than they actually are.

If you’re dubious about the ESG credentials of a company, it’s always worth conducting your own research into the supply lines and practices of the company.

Alternatively, we can help you avoid greenwashing and ensure that the investments held within your ethical pension properly align with your own ideals and morals.

Get in touch

If you’re determined to invest your wealth ethically to do your bit for the world around us, we can help you ensure your pension is as sustainable as possible.

Please email us at advise-me@fosterdenovo.com or call 0330 332 7866 for more information.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Pension income could also be affected by interest rates at the time benefits are taken. Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits. Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirements.