More people than ever are choosing to invest sustainably. This means selecting a plan that not only helps you save for retirement, but drives meaningful change and shapes a better world.
With an incredible £41 trillion invested globally, pensions have the collective power to drive positive change. Sustainable investing isn’t just about doing good, it can be a smart long-term financial strategy too.
Here’s three key reasons why choosing a sustainable pension could be a win for both your wallet and the world.
1. You can avoid ‘climate risk’
Climate change isn’t only a growing risk to the environment and our society, it also poses a significant risk to your pension returns.
Fossil fuels, responsible for 75% of global greenhouse gas emissions, are by far the biggest contributor to climate change. Yet around 10% of global pension funds are still tied to them. You’ll find oil and gas companies like BP and Shell in almost all major ‘default’ pension schemes.
If you’ve been auto-enrolled into a workplace pension, it’s likely that your retirement savings are in a default pension scheme. This means many people are unknowingly funding industries that contribute to climate change through their retirement savings, despite the growing availability of sustainable investment options that align with environmental and social values.
This isn’t because fund managers enjoy destroying the planet. It’s because fossil fuels have historically given, despite the odd shock, quite steady and dependable returns. They’ve been the engine of the global economy for a long time, with ever-increasing demand pushing up prices.
However, all this is changing. As the world shifts to renewable energy sources to hit net zero targets, fossil fuel investments - from oil wells to petrol and diesel cars - are predicted to plummet in value.
If this happens quickly, fossil fuels could become what’s known as ‘stranded assets‘. This could lead to significant losses for pension investors and even trigger a global financial crisis.
So, while returns on fossil fuels might look attractive for now, over the long term they’re increasingly seen as risky and unreliable investments. A sustainable pension, meanwhile, avoids investing in environmentally harmful industries like fossil fuels.
PensionBee’s new Climate Plan goes even further by excluding any companies with ties to fossil fuels based on revenues, power generation and reserves. It also actively invests in companies that are reducing their carbon emissions and driving the transition to a low carbon economy.
2. ‘Good’ businesses are good business
Sustainable pensions aim to invest in companies with strong Environmental, Social, and Governance (ESG) practices. These businesses strive to treat their customers, employees, and the planet responsibly and disclose their efforts transparently.
As well as being ‘morally right’, this strategy can be financially beneficial. Responsible companies are less likely to face scandals, lawsuits or regulatory fines. All of which can damage their reputation, share price and your pension returns.
American Investor and Philanthropist, Warren Buffet, famously said: “It takes 20 years to build a reputation and five minutes to ruin it.”
Take car manufacturer Volkswagen’s emissions scandal in 2015, known as ‘dieselgate‘. The company’s share price plunged by 30% almost instantly. It ended up paying €31.3 billion (£26.17 billion) in fines and settlements.
Similarly, fashion brand Boohoo’s share price fell 20% over the previous year and almost 90% over three years after it was revealed some UK workers were paid as little as £3.50 per hour.
Research backs this up. The United Nations’ Sustainable Development Goals (UNSDGs) have a globally agreed set of goals to end poverty and protect the planet. A study by the University of Zurich and Robeco found that companies aligned with the UNSDGs are less likely to become embroiled in scandals on ESG issues.
It revealed just a 1% increase in a business’s alignment with a single UNSDG led to an 11% decrease in the number of scandals it faced within a year. The decrease was even more pronounced (17%) for severe scandals.
Investing in companies with strong ESG practices can reduce risk with potential for better returns. Research shows that ESG investments can match or even outperform traditional investments in the long run.
According to the latest Sustainable Reality report from the Morgan Stanley Institute for Sustainable Investing, sustainable funds outperformed their traditional peers across all major asset classes and regions in 2023.
3. Investor demand is growing
Sustainable investments aren’t just a ‘nice to have’; they’re what the world needs if we’re going to have a future we can live in. Where we put our money will likely decide whether we can avoid escalating climate disasters and the irreparable loss of biodiversity - or not.
More and more savers are realising this. A Financial Lives Survey by the Financial Conduct Authority last year found that 81% of adults want their investments to do good as well as provide a financial return.
Businesses are catching on too. A Sustainability Report by Deloitte surveyed over 2,000 top executives and found that 85% of companies have increased their spending on sustainability in the past year.
Many business leaders now view sustainability as a way to generate long-term profits. In a recent survey, 92% said they’re confident they can expand their businesses while reducing emissions to address climate change. This is promising for investors backing companies committed to achieving net zero.
Consumer demand is driving much of this change. Over half of the executives surveyed said they’ve shifted their strategies because people’s buying habits and preferences are changing. For example, due to consumer feedback PensionBee launched their Climate Plan to help customers align their pensions with the Paris Agreement.
This shift needs to happen. Moving your investments away from polluting companies and towards those solving climate problems is key to the green transition. As demand for these solutions grows, naturally the value of investments in these companies is likely to grow too. In fact, US companies tackling climate change have seen an 18% higher return on investment - and 67% higher than those hiding their emissions.
Being on the right side of this positive change now - rather than investing in companies pushing against it - means you’re well positioned to benefit financially over the long term.
Lori Campbell is a Freelance Journalist specialising in sustainable finance and investing. She’s the Editor of ethical personal finance website, Good With Money. Lori was previously a Senior News Reporter at the Sunday Mirror.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
