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Ideas & Observations

How pensions can fight climate change

With COP26 drawing attention to business’ responsibility to reach net zero, pensions have emerged as the unexpected opportunity to make a huge impact on carbon footprints.

Make My Money Matter reveals that one person investing in a green pension is 21x more effective at reducing their carbon footprint than giving up flying, becoming vegetarian and switching energy provider combined.

With a growing number of people concerned over their contributions to the climate crisis, businesses can make a huge dent in their carbon emissions by switching to an Environmental, Social & Governance (ESG) fund.

Mark Parkinson, Partner at MHA Tait Walker Wealth Management explains how making the switch to green pensions now can make an impact, and why this might soon become standard practice for businesses.

How can a pension be effective in the fight against climate change?

The level of investment pension funds have in the shares of global companies gives them huge influence in shaping the future direction these companies take. By investing in ESG funds, the power is placed with climate-conscious investors who will work exclusively with companies that share their values.

The government has set out a clear path on climate change through updated investment regulations and now through the Pension Schemes Act 2021. Many schemes face requirements to report on climate change. The Pensions Regulator states that a core part of its work on climate change is to regulate and, if necessary, enforce against, these requirements. Trustees must clearly evidence that words and intentions translate into action. This includes reporting on their stewardship activities, which in some cases may be the most effective way to follow through on intentions regarding climate change. This is a rapidly evolving landscape and expectations on trustees and pension schemes will change over time.

Government backed plans may see all pensions be turned green. Are there any risks that could occur because of this?

Many pension scheme providers are launching new funds or amending the investment approach of existing funds to include Environmental, Social & Governance (ESG) at their core.

There is the risk that the investments in many funds will become very similar if all the funds are having to invest in the same way. This will restrict choice and could reduce overall pension fund returns as the fund managers won’t necessarily be able to invest in the way they want to going forward.

It is also possible that pension scheme trustees may not understand the impact of ESG funds and so if they fail to adjust their pension investments in line with the new approach, it is possible that the value of the pension fund for which they are trustees may suffer and so the member’s benefits will be reduced.

How can people take individual action to make their pension green?

If employees wish for their pensions scheme to be more ESG orientated, they will need to open dialogue with their employer. The employer will have chosen the pension scheme provider with an awareness of the level of risk and the investment approach that the default fund takes. Since they will likely be happy that this fits with their requirements, it might be difficult to persuade them to change to an ESG fund which is a relatively newer investment approach with little or no performance history. There will need to be a suitable number of checks made and advice taken but the good thing for employers is that workplace pensions have a cap on the annual management charge of 0.75% and so any change to the default won’t increase the charges by much or in most cases, anything at all.

Is MHA Tait Walker Wealth Management encouraging people to use their pensions to fight climate change?

Our current workplace pension scheme is about to change the default investment approach to one based solely around ESG, which most of our staff are opted into. Our change to an ESG fund has been clearly communicated to the team and follows suit with the pensions industry which is listening to people’s concerns about climate change.