In our weekly series, readers can email in with any questions about retirement and pension savings to be answered by our expert, Rachel Vahey, head of public policy at investment platform AJ Bell. There is nothing she does not know about pensions. If you have a question for her, email us at money@theipaper.com.
Question: I’ve been trying to make more environmentally friendly choices in my personal life, such as cutting my carbon footprint through energy and travel decisions. I’d now like my finances, including my pensions, to reflect those values too, as it’s very important to me I’m not killing the planet. Can you tell me how I can go about this? I have a workplace pension as well as a self-invested one.
Answer: Many of us are making efforts in our lives to be more environmentally friendly.
There is a growing realisation that those efforts don’t have to stop at the recycling bin, and that finance and environmental values are more closely related than previously believed. The choices you make elsewhere in your life can apply to finance as well.
A mixture of regulation and innovation should mean that you are able to choose pension funds that match your principles.
When you’re automatically enrolled into your workplace pension, your contributions are first invested in the scheme’s default fund. Many people stay in this fund, but you can switch to other investment options if they better suit your preferences.
Your pension scheme doesn’t have to offer a specific ESG (environmental, social and governance) fund. However, the people running the scheme must have policies explaining how they take account of ESG issues, including climate change, where these could affect the long-term performance of investments.
In practice, many workplace pensions do now offer an ESG-focused default fund or other ESG funds to choose from, so it’s worthwhile asking your pension scheme about the approach they take.
A SIPP gives you much more freedom over how your pension is invested. Most SIPP providers offer a wide range of ESG, sustainable and responsible investment options.
These range from broadly diversified funds that apply basic ESG screening, to funds with stricter ethical criteria, as well as specialist funds focused on areas such as climate change or clean energy.
The level of risk varies depending on the type of fund. Specialist funds can be more volatile because they invest in a narrower range of companies or sectors, while broader ESG funds tend to be more diversified. Having access to a wide range of investments allows you to build a portfolio that reflects both your financial goals and your personal values.
Thoughts in this area are developing fast. The Society of Pension Professionals (SPP) recently issued a paper – Pensions in a Warming World – showing that climate change influences a range of economic factors including investment returns, inflation, interest rates, longevity and economic growth.
The SPP argue that anyone making long-term financial decisions needs to take climate change into account – whether that’s the trustees running a workplace pension scheme, investment fund managers or you managing your own investments through a SIPP or other investment plans.
More extreme weather, new technology, changing regulations and shifts in consumer demand can all influence how businesses, and therefore investments, perform. Some companies are likely to benefit from the move to a lower-carbon economy, while others may struggle to adapt.
But climate change can also affect your retirement more broadly, as higher living costs, poorer health and weaker economic growth could reduce your quality of life in retirement, meaning you may need a larger pension fund to, perhaps literally, “weather the storm”.
In the future, thinking about “green issues” will likely go beyond just considering ESG funds. As climate change has a bigger impact on our world – as evidenced by the recent heatwave in the UK and Europe – it’s starting to affect our finances as well. And that has to be assessed alongside other more traditional investment risks.
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