How green is your workplace pension scheme?

Default funds have traditionally invested heavily in fossil-fuel companies and other big polluters. Eco-conscious employers have a chance to flip the script and do something meaningful to tackle the climate crisis
ESG workplace pensions

Over the past few years, PR consultancy FleishmanHillard has tried all the usual ways of reducing its environmental impact, such as encouraging employees to recycle and cutting back on business travel that uses less sustainable forms of transport. But the firm recently realised that it was overlooking an area where it could perhaps make a bigger difference: by switching the default workplace pension fund to a greener option. 

Many employees have thousands of pounds sitting in company pension schemes without realising that they may be funding industries that contribute heavily to global warming and environmental degradation. Moving that money to more ecologically sound alternatives – as an individual or as a business – could therefore be a great way to help tackle the climate crisis.

“Our workers tend to be young and engaged with climate issues. They care about the planet,” says Ian Williams, a director at FleishmanHillard. “We realised that the default pension fund we had wasn’t an ESG fund. We approached our pension provider and found that it had a more sustainable option, so we switched to that at the start of this year.”

The company has been running campaigns to encourage everyone to switch to the new fund, which has become the default option for all new recruits. 

“We’ve had really good take-up from employees happy to make a change,” Williams reports. “Where we invest this money makes a difference.”

What does a green pension achieve anyway?

Now imagine the difference it would make if every employer in the UK were to take similar action. Indeed, with about £3tn of investments under management, the nation’s pensions industry has a key role to play in humanity’s progress towards a sustainable future, says Rob Gardner, co-founder and co-CEO of environmental consultancy Rebalance Earth.

But even though climate action is becoming an increasingly important part of many investment schemes, a substantial amount of money invested through pensions still supports the fossil-fuel industry, which is responsible for most global greenhouse gas emissions. The average UK pension holder has just under £3,100 invested in that sector, translating to £88bn in total. That’s 10 times more than the sum invested in FTSE 350 firms mainly involved in green energy, according to estimates by campaign group Make My Money Matter.

How to start building a greener pension

Gardner would advise any business leader to establish where their firm’s existing scheme allocates its money. Then, if they feel that its investment mix could be more sustainable, they should focus on funds that prioritise low-carbon projects.

We’ve had really good take-up from employees happy to make a change

Funds typically offer a comprehensive breakdown of their investments by industry or even company on their websites. It’s often possible to check how a greener fund incorporates ESG factors into its investment decisions and to see if it’s using its clout as a big investor to encourage firms to adopt more sustainable practices. 

This kind of active engagement is important, according to Gardner. He believes that firms “can flex their influence by encouraging their pension providers to offer more sustainable options, pushing for stricter ESG disclosure requirements and supporting legislation that champions sustainable finance. By taking such proactive steps, businesses can ensure that their workplace pensions contribute not only to their employees’ financial freedom but also to a world that’ll be worth living in.”

The ESG ratings challenge

Of course, even with all the disclosures, it can still be hard to know exactly how green your pension fund’s investments are. Fund information can run to dozens of pages and may be littered with jargon that’s incomprehensible to the average investor. Greenwashing, where funds overplay their eco-credentials, is common. Some investors end up feeling misled about what their money is supporting. 

“It’s essential that the individual understands where their money is being invested,” says Stuart Breyer, CEO of Mallowstreet, an online platform for the UK institutional pensions sector. “The industry has a lot of work to do to help make this crystal clear for the end consumer.”

There is also confusion over how ESG ratings are decided. In June, Elon Musk criticised the decision by ratings agency S&P to give his electric car company, Tesla, a lower ESG ranking than oil giant Chevron. Tesla’s lack of focus on social and governance issues was among the reasons why it scored 37 out of a possible 100 for ESG factors, compared with Chevron’s total of 43.

How is the pensions market changing?

But new regulations are set to make it easier for investors to assess and compare funds. The EU’s Sustainable Finance Disclosures Regulation has made it mandatory for financial products and services offered or promoted within the bloc to disclose their ESG credentials. In the UK, the Financial Conduct Authority’s sustainability disclosure requirements are getting closer too, while the US Securities and Exchange Commission is also working on ESG reporting guidelines. 

It’s essential that the individual understands where their money is being invested

The main aim in each case is to “make the investment industry more transparent – and greenwashing more difficult,” says David Macdonald, founder of The Path, a financial adviser specialising in ESG investments.

Such measures “are to be welcomed”, he adds. “They will add some hard definition to an area that’s very vague. We’re already seeing financial advisers and fund managers having to pay more heed to this area and to clients’ wishes.” 

Employers’ pension schemes, then, undoubtedly have the potential to make a huge impact on the planet. Indeed, climate campaigners believe that investing in genuinely ESG-focused pension funds is likely to have more of a beneficial effect than recycling or going vegan.

So, by taking a close look at where your workplace pension scheme’s money is going, you can decide whether to switch to a provider or fund that’s more likely to make a positive difference. In moving to a genuinely green alternative, any organisation could take a significant chunk out of its collective carbon footprint.