The power of the humble pension — where does yours go?

Pensions are dull. They are about money and being old. Almost nobody wants to talk about them. People who do are exactly the kind of people you hope to avoid at a wedding. But pensions are also really important. They are the single largest collection of financial power in history. They are worth over $200 trillion globally. That is 100 times the size of the whole UK economy. And they are owned by us — the people. So surely we can do something with all this money?

In the news this month, we’ve all been following the Extinction Rebellion protests and schoolchildren striking across the world. They have brought public attention to the catastrophic effects of global warming, many of which are already being experienced around the world. In the past year alone, we’ve seen: Southern India faced the worst flooding in 100 years, Hurricane Florence’s catastrophic winds drove the evacuation of over 1 million people in America, the blistering summer heatwave caused food shortages across Europe and, most recently, Cyclone Idai killed over 1,000 people in Mozambique and Malawi. No country or community is immune. These events damage infrastructure, have disastrous implications on public health, decrease productivity and destroy wealth. Its indisputable that the enormous human and financial costs of climate change are already having a devastating effect on our collective wellbeing.

So, what can we mere citizens do? You may have already made lifestyle shifts in response to an impending planetary collapse — perhaps you’ve passed up on plastic, invested in a keep cup, installed some energy saving light bulbs or cut back on the burger habit.

But what about your pension pot? Before your eyes glaze over at the very mention of the dreaded ‘P’ word, what if I told you that the pension industry is worth over £2 trillion in the UK alone? Now you’re listening.

This blog explores what responsible pension investment could mean, investigating why now is the right time to act, and the steps that you can take to ensure that your pension is used for good.

How did this all begin?

Let’s rewind to the start. Back in December 2017, I stumbled across this article outlining a new investment regulation that legally binds the fiduciary duties of pension fund trustees to a host of factors which are financially material to the performance of investments — including environmental, social and governance (ESG) based issues. I know, so exciting. In practice, this means that pension fund managers do not have to maximise returns in the short-term, often at the expense of amplifying longer term risks. This small, but important, change of emphasis permits trustees to make investments that are based on non-financial factors — essentially empowering all British pension schemes to divest from fossil fuel investments if they wanted to.

What is pension divestment?

Divestment is the removal of investment capital from stocks, funds or bonds that promote or benefit from fossil fuels. The act of divestment is designed to exert economic pressure on companies to reduce greenhouse gas emissions. It’s similar to governments placing sanctions on political regimes that are thought to have done something wrong — like running Salisbury’s tourist industry. What was initially a grassroots movement, the act of divestment has since gained widespread attention and surpassed $8.7 trillion in divested assets globally.

Let’s take a quick look at just a handful of the 1,000+ strong (and growing) set of organisations who have divested:

• Over a third of UK universities have fossil free commitments, including £6.3 million and £3 million divestments by the Universities of Edinburgh and Bristol respectively
• New York City has fully divested the city’s pension fund
• The Republic of Ireland was the first country to divest its sovereign wealth fund
• AXA, global insurance giant, committed to divesting £350 million of its assets whilst tripling its investments in green technologies
• Just this week, UK Parliament have announced plans to reconsider their £700 million pension investments — which are ultimately paid for by the taxpayer — to account for the risk of climate change
• But the winner, with the largest divestment pledge to date, is Norway’s sovereign wealth fund, which got rid of a whopping $8 billion of assets– impacting over 120 companies worldwide

Divestment is just one approach and not everyone agrees it is the right one. Only 4% of divested organisations are for-profit companies — which is why this blog outlines what can be done in response to the wider trend of responsible investment.

Why is now the time to consider my pension investments?

Now that auto-enrolment has come into effect, everyone has a pension — meaning that everyone has a voice to decide who and what their money supports.

Impact investing, defined as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return, is one of the biggest financial trends of the last five years. You may recall Goldman Sachs committing a $150 billion investment into clean energy projects, or witnessed the multitude of funds having emerged with a focus on impact investing (i.e. TGP Partners’ RISE fund). Even the UK government, hamstrung as it is, has detailed plans to increase impact investments.

Governments and regulators are starting to ask tougher questions about how pension funds consider the type of future planet they are supporting. And just last week, Governors of the Bank of England and France’s Central Bank published an open letter warning on the existential threat that climate change poses on the global financial system unless “urgent steps are taken to reform”. In practice, this means a massive reallocation of capital to meet the 2°C Paris Agreement cap.

A rapid shift in shareholder activism and rising transparency requirements are also increasingly prompting businesses to rethink planning and disclosure. Just look to Larry Fink, CEO of one of the largest global asset managers with $1.7 trillion in assets, with his public letters to CEOs outlining the imperative for companies to socially invest — specifying societal contribution as pre-requisite for BlackRock’s future support in line with its Sustainable Investing Initiative. Even the fossil fuel grandee that is Shell has bowed to ethical investor pressure by tying executive pay to carbon emission targets.

So why the hold up?

Most people don’t know how their pension works. Nor do they care. There is very limited awareness that as ordinary people we have the option to actively manage where our pension investments go. Next to nobody participates in corporate governance initiatives — have you ever voted at an Annual General Meeting? Thought not. Not to mention that actively managing your pension can be difficult, time-consuming and a complex beast. Even if we do try to make a change, it isn’t always possible to know where our money goes (does the Church of England’s indirect investment in the now-collapsed Wonga after Justin Welby got all holy than thou about payday lending ring any church bells?). So what can we do to be more responsible in shaping the collective future we want?

Help!

How can I ensure that my workplace pension is used for good?

The good news is that there are loads of options to use your workplace pension investments for good, sat on a spectrum spanning from low to high impact (all with top-notch acronyms).

• A good start: Socially Responsible Investing (SRI) — negative screening to exclude industries such as fossil fuels, alcohol, gambling and tobacco
• Getting better: ESG Investing — incorporating ESG factors in the analysis, selection and management of investments
• Great: All the way to Sustainable Investing (SI) — investing in more progressive ESG oriented funds, looking to generate sustainable and beneficial societal impacts alongside a financial return

Okay, okay, I’m sold — what do I do next?

The first port of call is checking what your pension currently supports. Contact HR or your pension provider to see which companies your default pension fund invests in and check whether your employer offers an ESG-linked fund option which you can switch to.

If there is no responsible option, speak to HR to find out who the pension board of trustees are and meet with them to establish their appetite to consider making the default pension option for all employees to be in passive lifelong ESG fund investments. During this discussion, make sure you come armed with the benefits of doing so.

What benefits can I cite supporting responsible pension investment?

1. Financial returns

Doing good for the planet and its inhabitants is all well and good, but we haven’t forgotten that one day, when we are old and grey, we will rely on our pensions to support our coach trips to Hastings, Bridge club memberships, or whatever else we plan to sustain throughout our retirements. The good news is that, spoken by Larry Fink himself, “sustainable investing is simply smart investing”. As the market pivots towards renewables and responsible impact investing, investors are facing a dwindling return on investment from long-term fossil fuel assets. Let’s look at the evidence supporting this:

• In a seven year trial by Morgan Stanley, sustainable equity funds were found to outperform traditional equity funds, in five out of six equity classes
• A comprehensive meta-study of over 200 different sources by Oxford University and Arabesque revealed that, 88% of the time, firms engaging in sustainability practices have increased operational performance compared to those that do not
• Over the last five years, analysis of the world’s leading stock market index by MSCI has revealed that fossil fuel-free funds consistently outperform conventional funds, receiving a higher average return of 1.2% per annum

2. Risk mitigation

Investors are being driven away from finite coal, oil and gas assets as they seek to reduce their exposure to the risk posed by industry disruption to traditional fossil intensive models. But how much is at risk?

• The Task Force on Climate-related Financial Disclosures (TCFD) has now received support from 513 organisations, signalling growing momentum for climate-related disclosures and redefining how financial institutions understand climate risk
• It has been predicted that the world’s capital markets are carrying an un-burnable “carbon bubble”, putting $100 trillion of “stranded” fossil fuel assets at threat globally if no action is taken by 2050
• As economic growth decouples from fossil fuel demand, research has found the fossil fuel industry to be risking wasting $1 trillion in investments over the next decade

3. Employee selling point

Finally, using pension investments to support ESG causes can offer your company a powerful opportunity to attract and retain the best talent.

• Millennials care about climate change; they saw climate change and the destruction of nature as the most serious issue faced globally for the third year in a row at The World Economic Forum’s Global Shapers Survey
• Deloitte found 56% of Millennials to state that they would rule out working for a firm because of its values or ethics — responsible investment is a useful method to outwardly convey responsible business practices
• One of Fjord’s key trends of 2018 is the rise of this ethics economy whereby organisations are increasingly responding to pressure to proactively demonstrate what they stand for, as people choose brands that align with their own beliefs — engaging in responsible investments allows firms to ethically self-audit in tune with this

Where to look?

If all of the above still fails to grab the attention of your pension board, fear not — hope is not lost. You can take matters into your own hands and independently move your pension to a sustainably invested fund.

So you’d like to invest in the stocks of tomorrow, putting your money to good use — say supporting the likes of renewable technologies, circular business models, and promising eco start-ups — but where to look? I am by no means in any position to offer financial advice. Seriously, I’m not allowed to. But I can provide a starting point if you’d like a nudge in the right direction to start your hunt for a sustainable pension fund. Thanks to Ethical Consumer magazine (ECM) and 3D Investing’s (3D) third-party reports, I can highlight the following ethical funds which rank very well, as a starting point for your search:

How about taking this one step further and considering where your council pension goes?

You don’t have to stop at your workplace pension. Councils across the UK are currently investing more than £16 billion in the fossil fuel industry. It doesn’t have to be this way. In 2016, the London borough of Waltham Forest became the first UK public authority to announce its commitment to go 100% fossil free — since then, all £23.9 million that was invested in fossil fuel companies has been divested to invest in sustainable energy, transport and housing developments. More recently, the UK’s second largest city, Birmingham, has also voted to divest its pension funds. So why not join the worldwide movement of people asking their local institutions to divest from dirty energy? Follow these links to support your local campaign:

• Find out what your council has invested in fossil fuels and find your local divestment campaign using GoFossilFree’s interactive mapping tool
• Ask your MP to support the campaign to divest the Parliamentary pension fund from fossil fuels
• Follow Fossil Free UK on Facebook and Twitter, and sign up for email updates on our homepage to follow their #fuellingthefire campaign

With great power comes great responsibility

Through our pensions, we have all this potential power to change the world. It might feel distant, but it is real and is criminally under used. À la Spiderman, with great power comes great responsibility. It is incumbent of all of us who care about there being a habitable future to do more. Standing on a pink bus in Oxford Circus is commendable; but it isn’t the only option. Arm yourself with the knowledge you need to make sure that your money is contributing to the answer — not the problem. And the next time you sit down for a wedding dinner, perhaps you should ask your neighbour what they think about their pension.

All views expressed are my own, are not reflective of my employer and most certainly do not count as financial advice.